10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2006

or

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

For the transition period from              to             

Commission File Number: 1-12785

NATIONWIDE FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware	31-1486870
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
One Nationwide Plaza, Columbus, Ohio	43215
(Address of principal executive offices)	(Zip Code)

(614) 249-7111

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Class A Common Stock (par value $0.01 per share)	New York Stock Exchange
(Title of Class)	(Name of each exchange on which registered)

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    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  x    No  ¨

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

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  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Aggregate market value of the registrant’s voting common equity held by nonaffiliates on June 30, 2006 computed by reference to the closing sale price per share of the registrant’s Class A common stock on the New York Stock Exchange as of June 30, 2006 was $2.35 billion.

As of February 26, 2007, the registrant had 54,299,098 shares outstanding of its Class A common stock (par value $0.01 per share) and 91,778,717 shares outstanding of its Class B common stock (par value $0.01 per share).

Documents Incorporated by Reference

Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for the 2007 Annual Meeting of Shareholders.

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2006

TABLE OF CONTENTS

PART I		1
ITEM 1	BUSINESS	1
ITEM 1A	RISK FACTORS	16
ITEM 1B	UNRESOLVED STAFF COMMENTS	19
ITEM 2	PROPERTIES	19
ITEM 3	LEGAL PROCEEDINGS	19
ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	19
PART II		20
ITEM 5	MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	20
ITEM 6	SELECTED CONSOLIDATED FINANCIAL DATA	23
ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
ITEM 7A	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	72
ITEM 8	CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	80
ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	80
ITEM 9A	CONTROLS AND PROCEDURES	80
ITEM 9B	OTHER INFORMATION	81
PART III		82
ITEM 10	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	82
ITEM 11	EXECUTIVE COMPENSATION	85
ITEM 12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	86
ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	86
ITEM 14	PRINCIPAL ACCOUNTING FEES AND SERVICES	86
PART IV		87
ITEM 15	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	87
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF MANAGEMENT		F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-3
CONSOLIDATED STATEMENTS OF INCOME		F-4
CONSOLIDATED BALANCE SHEETS		F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY		F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS		F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		F-8
SIGNATURES		F-77

PART I

ITEM 1    BUSINESS

Overview

Nationwide Financial Services, Inc. (NFS, or collectively with its subsidiaries, the Company) was formed in November 1996. NFS is the holding company for Nationwide Life Insurance Company (NLIC) and other companies that comprise the domestic life insurance and retirement savings operations of the Nationwide group of companies (Nationwide). This group includes Nationwide Financial Network (NFN), which refers to Nationwide Life Insurance Company of America (NLICA) and subsidiaries, including the affiliated distribution network. NFS is incorporated in Delaware and maintains its principal executive offices in Columbus, Ohio.

The Company is a leading provider of long-term savings and retirement products in the United States of America (U.S.). The Company develops and investment sells a diverse range of products including individual annuities, private and public sector group retirement plans, other investment products sold to institutions, life insurance and investment advisory services.

The Company sells its products through a diverse distribution network. Unaffiliated entities that sell the Company’s products to their own customer bases include independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, and life insurance specialists. Representatives of the Company that market products directly to a customer base include Nationwide Retirement Solutions, Inc. (NRS), an indirect wholly-owned subsidiary; NFN producers; The 401(k) Company, an indirect wholly-owned subsidiary (see Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)—Overview—Discontinued Operations for information about the pending sale of The 401(k) Company); and TBG Insurance Services Corporation d/b/a TBG Financial (TBG Financial), a majority-owned subsidiary, through its joint venture with MC Insurance Agency Services, LLC d/b/a Mullin Consulting (Mullin Consulting). The Company also distributes retirement savings products through the agency distribution force of its ultimate majority parent company, Nationwide Mutual Insurance Company (NMIC). The Company believes its broad range of competitive products, strong distributor relationships and diverse distribution network position it to compete effectively in the rapidly growing retirement savings market under various economic conditions.

The Company has grown its customer base in recent years as a result of its long-term investments in developing the distribution channels necessary to reach its target customers and the products required to meet the demands of these customers. The Company believes its growth has been enhanced further by favorable demographic trends and the growing tendency of Americans to supplement traditional sources of retirement income with self-directed investments, such as products offered by the Company. From 1997 to 2006, the Company’s customer funds managed and administered grew from $57.46 billion to $174.89 billion, a compound annual growth rate of 11.77%. Asset growth during this period resulted from net flows into the Company’s products, interest credited to and market appreciation of policyholder account values, and acquisitions.

Capital Stock Transactions

The 54.2 million shares of Class A common stock outstanding as of December 31, 2006 are publicly held and primarily were issued through NFS’ initial public offering completed in March 1997 and in conjunction with the acquisition of NFN in October 2002. The Class A shares represent 37.1% of the equity ownership in NFS and 5.6% of the combined voting power of NFS’ Class A and Class B common stock as of December 31, 2006. Nationwide Corporation (Nationwide Corp.) owns all of the outstanding shares of Class B common stock, which represents the remaining 62.9% equity ownership and 94.4% of the combined voting power of the shareholders of NFS as of December 31, 2006. Nationwide Corp. is a majority-owned subsidiary of NMIC.

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Business Segments

Individual Investments

The Individual Investments segment consists of individual The BEST of AMERICA^® and private label deferred variable annuity products, individual annuity products, deferred fixed annuity products, income products and investment advisory services. Individual deferred annuity contracts provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum, systematic withdrawal or a stream of payments for life. In addition, individual variable annuity contracts provide the customer with access to a wide range of investment options and asset protection features, while individual fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.

The following table summarizes selected financial data for the Company’s Individual Investments segment for the years ended December 31:

(in millions)	2006		2005		2004
Total revenues	$	1,514.3	$	1,514.5	$	1,477.4
Pre-tax operating earnings		210.8		237.0		234.4
Account values as of year end		52,963.6		51,227.6		52,481.9

The Company believes that demographic trends and shifts in attitudes toward retirement savings will continue to support increased consumer demand for its individual investment products. The Company also believes that it possesses distinct competitive advantages in the market for variable annuities. Some of the Company’s most important advantages include its innovative product offerings and strong relationships with independent well-known fund managers. The Company’s principal annuity product series, The BEST of AMERICA, allows customers to choose from over 50 investment options, which include funds managed by many of the premier U.S. mutual fund managers. The Company also sells individual fixed annuities, primarily through the financial institutions channel.

The Company markets its Individual Investments products through a broad spectrum of distribution channels, including independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, NRS, NFN producers and Nationwide agents. The Company is trying to increase its market share of sales through these channels by working closely with its investment managers and product distributors to adapt the Company’s products and services to changes in the retail and institutional marketplace.

In addition to generating significant fee income, the variable annuity business is attractive to the Company because it generally requires less capital support than fixed annuity and traditional life insurance products. This is because the investment risk on variable annuity contracts without guarantee features is borne by the customer. The Company receives income from variable annuity contracts primarily in the form of asset fees. Most of the Company’s variable annuity products include a contingent deferred sales charge, also known as a “surrender charge” or “back-end load,” This charge is assessed against premium withdrawals in excess of specified amounts in the early years of the contract (usually the first seven years). Surrender charges are intended to protect the Company from withdrawals before the Company has had the opportunity to recover its initial sales expenses. Generally, surrender charges on individual variable annuity products are 7% of deposits withdrawn during the first year, scaling ratably to no charge for the eighth year and beyond. Surrender charge periods of zero and four years are also available in some of the Company’s products.

The Company’s variable annuity products consist almost entirely of flexible premium deferred variable annuity (FPVA) contracts. Such contracts are savings vehicles in which the customer makes a single deposit or series of deposits. The customer has the flexibility to invest in mutual funds managed by independent investment managers and an affiliate of NMIC, NWD Investment Management, Inc. (NWD), formerly Gartmore Global Investments, Inc. (see Part II, Item 7—MD&A—Overview—Acquisition for more information). In addition to mutual fund elections, fixed investment options are available to customers who purchase certain of the Company’s variable annuities by designation of some or all of their deposits to such options. A fixed option offers the customer a guarantee of principal and a guaranteed interest rate for a specified period of time. Deposit intervals and amounts are flexible and, therefore, subject to variability. The value of a variable annuity fluctuates in accordance with the

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investment experience of the underlying mutual funds chosen by the customer. Such contracts have no maturity date and remain in force until the customer elects to take the proceeds of the annuity as a single payment or as a specified income stream for life or for a fixed number of years. The customer is permitted to withdraw all or part of the accumulated value of the annuity, less any applicable surrender charges, at any time. As specified in the FPVA contract, the customer generally can elect from a number of payment options that provide either a fixed or variable stream of benefit payments.

Guarantees are a common feature throughout the variable annuity industry. In addition to tax deferral, death benefit and living benefit guarantees differentiate variable annuities from other securities available in the financial services marketplace. Nearly all of the Company’s individual variable annuity products include guaranteed minimum death benefit (GMDB) features. A GMDB generally provides additional benefits if the annuitant dies and the policyholder’s contract value is less than a defined amount, which may be based on the premiums paid less amounts withdrawn or a policyholder contract value on a specified anniversary date. While GMDBs do create additional risk to the Company, such benefits are generally less valuable and less sensitive to assumption risk than living benefits. Accordingly, the Company is careful to offer only living benefit features that meet an acceptable risk/return profile. Beginning in 1999, the Company began offering optional guaranteed minimum income benefits (GMIBs), a living benefit that provides for enhanced annuitization guarantees. During 2003, the Company replaced its GMIB offering with Capital Preservation Plus, a guaranteed minimum accumulation benefit (GMAB) that provides a minimum investment return over 5 to 10 year horizons regardless of actual account performance. In March 2005, the Company further modified its GMAB offering into a hybrid GMAB/guaranteed lifetime withdrawal benefit (GLWB) called Capital Preservation Plus Lifetime Income (CPPLI). This feature provides an enhanced retirement income floor option following the maturity of the GMAB guarantee. In March 2006, the Company added a stand-alone guaranteed lifetime withdrawal benefit (GLWB), Lifetime Income (L.INC), to compliment CPPLI in its product offerings. L.INC provides for enhanced retirement income security via guaranteed accumulation rates and withdrawal rates that increase with age without the liquidity loss associated with annuitization. The Company continually refines these features to keep them attractive to prospective buyers while also balancing the risk and costs borne by the Company. See Note 10 to the audited consolidated financial statements included in the F pages of this report for further discussion of variable annuity contracts offered by the Company.

Fixed annuity products are marketed to individuals who seek long-term savings products that provide a guarantee of principal, a stable net asset value and a guarantee of the interest rate to be credited to the principal amount for a specified period of time. Fixed annuities generally consist of single premium deferred annuity (SPDA) and flexible premium deferred annuity (FPDA) contracts with initial interest guarantees of one to five years and annual re-determination of crediting rates thereafter. Both SPDAs and FPDAs are subject to long-term minimum crediting rates generally ranging from 1.5% to 3.5%. The Company invests fixed annuity customer deposits at its discretion in its general account investment portfolio, while variable annuity customer deposits are invested in mutual funds as directed by the customer and are held in the Company’s separate account. Unlike variable annuity assets that are held in the Company’s separate account, the Company bears the investment risk on assets held in its general account. The Company attempts to earn a spread by investing a customer’s deposits for higher yields than the interest rate it credits and associated expenses. Most fixed annuity contracts provide for the imposition of surrender charges, which are assessed against withdrawals (in excess of specified amounts) and serve to reimburse the company for unrecovered acquisition costs in the event of early termination. Generally, surrender charges on individual fixed annuity products are 6% to 8% of deposits withdrawn during the first year and typically decline from year to year, disappearing after five to seven contract years. Surrender charges are often limited to interest earned since inception. SPDA and FPDA contracts have no maturity date and remain in force until the customer elects to take the proceeds of the annuity as a single payment or as a specified income stream for life or for a fixed number of years. The Company’s individual fixed annuity products are primarily distributed through unaffiliated financial institutions and affiliated channels.

In 2005, the Company began issuing a fixed equity-indexed annuity (EIA) known as Clear Horizon. Unlike traditional individual fixed annuities, EIAs provide for interest earnings that are linked to the performance of specified equity market indices. Clear Horizon is a single premium, annual reset EIA under which an index credit

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is made (if applicable) on the last day of the calendar quarter of each policy anniversary, known as the index maturity date. The index credit is based on changes in the Standard & Poor’s (S&P) 500 Index and is subject to an index cap that varies based on when a contract is issued. Index credits are guaranteed to never be less than 0%.

Income products include single premium immediate annuity (SPIA) contracts. SPIAs are annuities that require a one-time deposit in exchange for guaranteed periodic annuity benefit payments, either for a certain period of time or for the contractholder’s lifetime.

During 2006, the average net investment income earned and interest credited rates on contracts (including the fixed option under the Company’s variable contracts) in the Individual Investments segment were 5.74% and 3.76%, respectively (5.61% and 3.69%, respectively, in 2005).

The Company offers individual variable annuities under The BEST of AMERICA brand name. The Company also markets individual variable annuities as “private label” products.

Individual The BEST of AMERICA Products. The Company’s principal individual FPVA contracts are sold under the brand name The BEST of AMERICA, and the Company also offers FPVA contracts under different names. The BEST of AMERICA brand name individual variable annuities accounted for $4.39 billion (81%) of the Company’s Individual Investments segment sales in 2006 ($3.14 billion, or 76%, in 2005, and $3.67 billion, or 69%, in 2004) and $36.11 billion (68%) of the Company’s Individual Investments segment account values as of December 31, 2006 ($32.94 billion, or 64%, as of December 31, 2005). During 2003, the Company launched a series of new BEST of AMERICA products designed to allow for greater specialization of product design by distribution channel, new liquidity options with shorter surrender charges, and enhanced death benefit and living benefit guarantees. America’s MarketFLEX Annuity is a specialty variable annuity offering tactical asset allocation services. All of these products generate asset fees and also may generate administration fees for the Company.

Private Label Individual Variable Annuities. These products accounted for $356.6 million (7%) of the Company’s Individual Investments segment sales in 2006 ($346.6 million, or 8%, in 2005, and $449.0 million, or 8%, in 2004) and $7.32 billion (14%) of the Company’s Individual Investments segment account values as of December 31, 2006 ($7.40 billion, or 14%, as of December 31, 2005). The Company has developed several private label variable annuity products in conjunction with other financial intermediaries. These products allow financial intermediaries to market products with substantially the same features as the Company’s brand name products to their own customer bases under their own brand names. The Company believes these private label products strengthen the Company’s ties to certain significant distributors of the Company’s products. These products generate asset fees and also may generate administrative fees for the Company.

Individual Deferred Fixed Annuity Contracts. Deferred fixed annuities consist of SPDA and FPDA contracts. Total deferred fixed annuities accounted for $186.5 million (3%) of the Company’s Individual Investments segment sales in 2006 ($194.4 million, or 5%, in 2005, and $858.8 million, or 16%, in 2004) and $6.54 billion (12%) of the Company’s Individual Investments segment account values as of December 31, 2006 ($8.04 billion, or 16%, as of December 31, 2005). SPDA and FPDA contracts are distributed primarily through financial institutions and Nationwide agents.

Individual Single Premium Immediate Annuity Contracts. The Company offers both fixed and variable SPIA contracts. SPIA contracts accounted for $230.7 million (4%) of the Company’s Individual Investments segment sales in 2006 ($196.7 million, or 5%, in 2005, and $168.4 million, or 3%, in 2004) and $2.03 billion (4%) of the Company’s Individual Investments account segment values as of December 31, 2006 ($1.98 billion, or 4%, as of December 31, 2005). SPIAs are annuities that require a one-time deposit in exchange for guaranteed, periodic annuity benefit payments, often for the contractholder’s lifetime. SPIA contracts are attractive to customers at or near retirement age that desire a steady stream of future income. The Company’s SPIA contracts are offered through both affiliated and unaffiliated distribution channels and may be purchased directly or though annuitization of any of the Company’s various individual and group deferred annuity contracts.

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Retirement Plans

The Retirement Plans segment is comprised of the Company’s private and public sector retirement plans business. The private sector primarily includes Internal Revenue Code (IRC) Section 401(k) fixed and variable group annuity business generated through NLIC and trust and custodial services through Nationwide Trust Company, FSB a division of Nationwide Bank (NTC). Also included in the private sector is Registered Investment Advisors Services, Inc. d/b/a RIA Services Inc. (RIA), which facilitates professional money management of participant assets by registered investment advisors. The public sector primarily includes IRC Section 457 and Section 401(a) business in the form of full-service arrangements that provide plan administration and fixed and variable group annuities as well as administration-only business. Retirement Plans sales do not include large case retirement plan acquisitions and Nationwide employee and agent benefit plans.

The following table summarizes selected financial data for the Company’s Retirement Plans segment for the years ended December 31:

(in millions)	2006		2005		2004
Total revenues	$	1,110.9	$	1,041.7	$	979.5
Pre-tax operating earnings		216.5		187.8		180.3
Account values as of year end		97,418.9		82,998.5		76,661.2

Most private sector plans are sold through the Company’s trust product offerings. The Company also sells group annuity products, the majority of which are fixed annuities offered as an investment option along with the trust product offering. The mix of product sales is consistent with the Company’s significant investment in NTC to develop trust product capabilities not prevalent elsewhere in the market.

The Company’s variable group annuity and trust products provide individual participants the ability to invest in mutual funds managed by independent investment managers and NWD. Deposit intervals and amounts are flexible and, therefore, subject to variability. The value of a variable group annuity varies with the investment experience of the mutual funds chosen by participants. Participants are restricted in their ability to withdraw funds from these contracts without tax penalties. The Company receives income from variable group annuity and trust contracts primarily in the form of asset and administrative fees. In addition, many of the Company’s variable group annuity and trust products provide for a surrender charge that is assessed against withdrawals in excess of specified amounts made during a specified period, usually not exceeding nine years from contract issuance. Surrender charges are intended to protect the Company from withdrawals early in the contract period, before the Company has had the opportunity to recover its sales expenses.

The Company’s fixed group annuity contracts provide individual participants a guarantee of principal and a guaranteed interest rate for a specified period of time. The Company attempts to earn a spread by investing a participant’s deposits for higher yields than the interest rate credited to the participant’s contract.

During 2006, the average net investment income earned and interest credited rates on fixed contracts in the Retirement Plans segment were 5.88% and 4.07%, respectively (6.08% and 4.18%, respectively, during 2005).

The Company markets employer-sponsored group annuities to both public sector employees for use in connection with plans described under IRC Section 457, Section 403(b) and Section 401(a) and to private sector employees for use in connection with IRC Section 401(k) and Section 401(a) plans. These private sector employer-sponsored group annuities are marketed under several brand names, including The BEST of AMERICA Group Pension Series.

The BEST of AMERICA Group Pension Series. These products are offered as group annuity contracts and trust products by NTC. The BEST of AMERICA group annuity products accounted for $1.23 billion (10%) of the Company’s Retirement Plans segment sales in 2006 ($1.37 billion, or 13%, in 2005, and $1.68 billion, or 17%, in 2004) and $7.56 billion (8%) of the Company’s Retirement Plans account values as of December 31, 2006 ($7.79 billion, or 9%, as of December 31, 2005). Trust products accounted for $4.50 billion (38%) of

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segment sales in 2006 ($3.97 billion, or 37%, in 2005, and $3.23 billion, or 33%, in 2004) and $18.83 billion (19%) of segment account values as of December 31, 2006 ($14.48 billion, or 17%, as of December 31, 2005). The BEST of AMERICA group products are typically offered only on a tax-qualified basis. These products may be structured with a variety of features that may be arranged in over 600 combinations of front-end loads, back-end loads and asset-based fees.

Section 457 Group Annuity Contracts. These group annuity contracts accounted for $1.53 billion (13%) of the Company’s Retirement Plans segment sales in 2006 ($1.54 billion, or 14%, in 2005, and $1.51 billion, or 15%, in 2004) and $15.98 billion (16%) of the Company’s Retirement Plans segment account values as of December 31, 2006 ($15.79 billion, or 19%, as of December 31, 2005). The Company offers a variety of group variable annuity contracts that are designed primarily for use in conjunction with plans described under IRC Section 457, which permits employees of state and local governments to defer a certain portion of their annual income and invest such income on a tax-deferred basis. These contracts typically generate asset fees and also may generate annual administrative fees for the Company.

Administration-Only Contracts. The Company offers administration and record-keeping services to IRC Section 457 plans outside of a group annuity contract. The contracts for these services accounted for $2.49 billion (21%) of the Company’s Retirement Plans segment sales in 2006 ($2.34 billion, or 22%, in 2005, and $2.12 billion, or 22%, in 2004) and $27.97 billion (29%) of the Company’s Retirement Plans segment account values as of December 31, 2006 ($24.30 billion, or 29%, as of December 31, 2005). In the past few years, the Company has experienced a shift in product mix from group annuity contracts to more administration-only cases. The Company collects a fee for administration-only contracts either as a percentage of plan assets or as a specified amount per participant or contract.

NFN Group Annuities. NFN sells Selector+ Group Variable Annuities, which accounted for $188.2 million (2%) of the Company’s Retirement Plans segment sales in 2006 ($205.9 million, or 2%, in 2005, and $335.8 million, or 3%, in 2004) and provide a diversified investment menu of separate accounts. The All Pro series of separate accounts is a series of multi-managed, style-specific separate accounts developed in conjunction with Wilshire Associates, Inc. The All Pro series is used in the STAR Program to develop asset allocation models. The STAR Program was developed to address the needs of plan sponsors making investment decisions to meet the stated objectives of their plan. The Selector+ Group Variable Annuity is available for governmental and corporate qualified retirement plans and has the flexibility to enable producers to choose from asset-based fees, deposit-based fees or a combination of both.

Individual Protection

The Individual Protection segment consists of investment life insurance products, including individual variable, corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) products; traditional life insurance products; universal life insurance products; and the operating results of TBG Financial. Life insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.

The following table summarizes selected financial data for the Company’s Individual Protection segment for the years ended December 31:

(in millions)	2006		2005		2004
Total revenues	$	1,345.5	$	1,348.5	$	1,350.1
Pre-tax operating earnings		274.8		258.2		242.7
Life insurance policy reserves as of year end		19,686.8		17,388.6		15,683.0
Life insurance in force as of year end		133,312.7		126,361.1		109,225.7

The Company seeks to become a leading provider of life insurance and protection solutions to small businesses and consumers, helping individuals achieve financial security as they prepare for and live in retirement. By continuing to invest in the expansion of its universal and variable universal life insurance products, the Company seeks to capture a growing share of new sales through its various distribution channels.

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The Company markets its Individual Protection products through a broad spectrum of distribution channels. Unaffiliated entities that sell these products to their own customer bases include independent broker/dealers, financial institutions, wirehouse and regional firms, brokerage general agencies and producer groups, and life insurance specialists. Representatives of the Company who market these products directly to a customer base include Mullin TBG Insurance Agency Services, LLC (Mullin TBG), NFN producers and Nationwide agents.

COLI and BOLI Products. Corporations purchase COLI, whereas banks purchase BOLI, to fund non-qualified benefit plans. Corporations or banks may make a single premium payment or a series of premium payments. For fixed COLI and BOLI products, premium payments are credited with a guaranteed interest rate that is fixed for a specified period of time. For variable COLI and BOLI products, the contractholder’s account value is credited with the investment experience of the underlying funds selected by the contractholder. COLI and BOLI products are sold through life insurance specialists, including Mullin TBG.

Traditional Life Insurance Products. Whole life insurance combines a death benefit with a savings plan that increases gradually over a period of years. The customer generally pays a level premium over the expected lifetime. Whole life insurance contracts allow customers to borrow against the savings and provide the option of surrendering the policy and receiving the accumulated cash value rather than the death benefit. Term life insurance provides only a death benefit without any savings component. Traditional life insurance products are sold through NFN producers and Nationwide agents, wirehouse and regional firms, and independent broker/dealers.

Universal Life and Variable Universal Life Insurance Products. The Company offers universal life insurance and variable universal life insurance products, including both flexible premium and single premium designs. These products provide life insurance under which the benefits payable upon death or surrender depend upon the policyholder’s account value. Universal life insurance provides whole life insurance with flexible premiums and adjustable death benefits. For universal life insurance, the policyholder’s account value is credited an adjustable rate of return set by the Company based on current interest rates. For variable universal life insurance, the policyholder’s account value is credited with the investment experience of the mutual funds chosen by the customer. Variable universal life insurance products also typically include a general account guaranteed interest investment option. The Company’s variable universal life insurance products are marketed under the Nationwide and The BEST of AMERICA brand names, which have the same wide range of investment options as the Company’s variable annuity products. These products are distributed on an unaffiliated basis by independent broker/dealers, financial institutions, and wirehouse and regional firms, brokerage general agencies and producer groups, and on an affiliated basis by NFN producers and Nationwide agents.

Corporate and Other

The Corporate and Other segment includes structured products business; the medium-term note (MTN) program; net investment income and certain expenses not allocated to other segments; periodic net coupon settlements on non-qualifying derivatives; trading portfolio realized gains and losses; trading portfolio valuation changes; interest expense on debt; revenues and expenses of the Company’s non-insurance subsidiaries not reported in other segments; and net realized gains and losses related to securitizations.

The following table summarizes selected financial data for the Company’s Corporate and Other segment for the years ended December 31:

(in millions)	2006			2005		2004
Operating revenues	$	445.4		$	385.0	$	310.0
Pre-tax operating earnings		67.7			55.7		58.6
Net realized (losses) gains on investments, hedging instruments and hedged items1		(0.6	)		18.2		(40.9	)

¹ Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).

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Structured Products. Structured products transactions include structuring, selling and managing investment programs, including securitizations. The Company utilizes such transactions to optimize portfolio management decisions, generate fee income and increase assets under management. Structured products transactions completed by the Company to date include collateralized bond obligations, commercial mortgage loan securitizations and low-income-housing tax credit syndications.

MTN Program. The Company’s MTN program represents sales of funding agreements that secure medium-term notes issued through an unrelated third party trust. This program was launched in July 1999 to expand spread-based product offerings. Sales of funding agreements totaled $1.78 billion in 2006 ($900.0 million in 2005 and 2004) and accounted for the majority of the Company’s Corporate and Other segment account values as of December 31, 2006 and 2005. Sales under the Company’s MTN program are not included in the Company’s sales data, as they do not produce steady production flow that lends itself to meaningful comparisons.

Marketing and Distribution

The Company provides, through both its affiliated and unaffiliated channels, the means for employers sponsoring tax-favored retirement plans (such as those described in IRC Sections 401(k) and 457) to allow their employees to make contributions to such plans through payroll deductions. Typically, the Company receives the right from an employer to market products to employees and arranges to deduct periodic deposits from the employees’ regular paychecks. The Company believes that the payroll deduction market is characterized by more predictable levels of sales than other markets because these customers are less likely than customers in other markets to stop making annuity deposits, even in times of market volatility. In addition, the Company believes that payroll deduction access to customers provides significant insulation from competition by providing the customer with a convenient, planned method of periodic saving. Payroll deduction is the primary method used for collecting premiums and deposits in both the private sector market, where the Company’s products are distributed primarily through unaffiliated entities, and in the public sector market, where the Company’s products are distributed primarily by affiliated entities.

See Part II, Item 7—MD&A for sales by distribution channel for the years ended December 31, 2006, 2005 and 2004.

Unaffiliated Entities

Independent Broker/Dealers and Wirehouse and Regional Firms. The Company sells individual annuities, group retirement plans and life insurance through independent broker/dealers and wirehouse and regional firms in each state and the District of Columbia. The Company believes that it has developed strong broker/dealer relationships based on its diverse product mix, large selection of fund options and administrative technology. In addition to such relationships, the Company believes its financial strength and the Nationwide and The BEST of AMERICA brand names are competitive advantages in these distribution channels. The Company regularly seeks to expand this distribution network.

Financial Institutions. The Company markets individual variable and fixed annuities (under its brand names and on a private label basis), 401(k) plans and life insurance through financial institutions, consisting primarily of banks and their subsidiaries. The Company believes that it has competitive advantages in this distribution channel, including its expertise in training financial institution personnel to sell annuities and pension products, its breadth of product offerings, its financial strength, the Nationwide and The BEST of AMERICA brand names, and the ability to offer private label products.

Pension Plan Administrators. The Company markets group retirement plans organized pursuant to IRC Section 401 and sponsored by employers as part of employee retirement programs through regional pension plan administrators. The Company also has linked pension plan administrators with the financial planning community to sell group pension products. The Company targets employers with 25 to 2,000 employees because it believes that these plan sponsors tend to require extensive record-keeping services from pension plan administrators and therefore are more likely to become long-term customers.

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Life Insurance Specialists. The Company markets COLI and BOLI through life insurance specialists, which are firms that specialize in the design, implementation and administration of executive benefit plans.

Affiliated Entities

NRS. The Company markets various products and services to the public sector, primarily on a retail basis, through several subsidiary sales organizations. The Company markets group variable annuities and fixed annuities as well as administration and record-keeping services to state and local governments for use in their IRC Section 457 and Section 401(a) retirement programs. The Company maintains endorsement arrangements with state and local government entities, including the National Association of Counties (NACo), The United States Conference of Mayors (USCM) and The International Association of Fire Fighters (IAFF).

NFN Producers. NFN producers specialize in marketing asset accumulation, wealth preservation, life insurance, retirement and investment products to affluent individuals and business markets. NFN’s products (primarily variable life insurance and group annuities), are distributed through career agents, independent agents and a pension sales force. In addition to NFN products, NFN producers also sell other NFS products.

The 401(k) Company. The 401(k) Company provides administrative and record-keeping services to employers in the private sector for use in their IRC Section 401(k) retirement programs. The sale of The 401(k) Company is expected to be finalized effective March 31, 2007 (see Part II, Item 7—MD&A—Overview—Discontinued Operations for more information).

TBG Financial. TBG Financial sells, through its joint venture with Mullin Consulting, NFS and unaffiliated entity COLI and BOLI products to fund non-qualified deferred compensation programs.

Nationwide Agents. The Company sells traditional, universal and variable universal life insurance products and individual annuities through the licensed agency distribution force of NMIC. Nationwide agents primarily target the holders of personal automobile and homeowners’ insurance policies issued by NMIC and affiliated companies. Nationwide agents exclusively sell Nationwide products and may not offer products that compete with those of the Company.

Reinsurance

The Company follows the industry practice of reinsuring a portion of its life insurance and annuity risks with other companies in order to reduce net liability on individual risks, to provide protection against large losses and to obtain greater diversification of risks. The maximum amount of individual ordinary life insurance retained by the Company on any one life is $5.0 million. The Company cedes insurance primarily on an automatic basis, whereby risks are ceded to a reinsurer on specific blocks of business where the underlying risks meet certain predetermined criteria, and on a facultative basis, whereby the reinsurer’s prior approval is required for each risk reinsured. The Company also cedes insurance on a case-by-case basis, particularly where the Company may be writing new risks or is unwilling to retain the full costs associated with new lines of business. The Company maintains catastrophic reinsurance coverage to protect against large losses related to a single event. The ceding of risk does not discharge the original insurer from its primary obligation to the policyholder.

The Company has entered into reinsurance contracts with certain unaffiliated reinsurers to cede a portion of its general account life, annuity and health business. Total amounts recoverable under these reinsurance contracts include ceded reserves, paid and unpaid claims, and certain other amounts, and totaled $1.09 billion and $1.10 billion as of December 31, 2006 and 2005, respectively. The impact of these contracts on the Company’s results of operations is immaterial. The ceding of risk does not discharge the original insurer from its primary obligation to the contractholder. Under the terms of the contracts, specified assets have been placed in trusts as collateral for the recoveries. The trust assets are invested in investment grade securities, the fair value of which must at all times be greater than or equal to 100% or 102% of the reinsured reserves, as outlined in each of the underlying

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contracts. Certain portions of the Company’s variable annuity guaranteed benefit risks are also reinsured. These treaties reduce the Company’s exposure to death benefit and income benefit guarantee risk in the Individual Investments segment. The Company has no other material reinsurance arrangements with unaffiliated reinsurers.

The Company’s only material reinsurance agreements with affiliates are the modified coinsurance agreements pursuant to which NLIC ceded to other members of Nationwide all of its accident and health insurance business not ceded to unaffiliated reinsurers, as described in Note 17 to the audited consolidated financial statements included in the F pages of this report.

Ratings

Ratings with respect to claims-paying ability and financial strength are an important factor in establishing the competitive position of insurance companies. These ratings represent each rating agency’s opinion of an insurance company’s financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. They are not evaluations directed toward the protection of investors and are not recommendations to buy, sell or hold securities. Such factors are of concern to policyholders, agents and intermediaries. Furthermore, rating agencies utilize proprietary capital adequacy models to establish ratings for the Company and certain subsidiaries. The Company’s ratings are at risk from changes in these models and the impact that changes in the underlying business in which it is engaged can have on such models. In an effort to minimize the adverse impact of this risk, the Company maintains regular communications with the rating agencies, performs evaluations using such capital adequacy models, and considers such models in the design of its products and transactions.

Ratings are important to maintaining public confidence in the Company and its ability to market its annuity and life insurance products. Rating agencies continually review the financial performance and condition of insurers, including the Company. Any lowering of the Company’s ratings could have a material adverse effect on the Company’s ability to market its products and could increase the rate of surrender of the Company’s products. Both of these consequences could have a material adverse effect on the Company’s liquidity and, under certain circumstances, net income. NLIC (and its insurance company subsidiary) and NLICA (and its main insurance company subsidiary) each have financial strength ratings of “A+” (Superior) from A.M. Best Company, Inc. (A.M. Best). Both NLIC and NLICA’s claims-paying ability/financial strength are rated “Aa3” (Excellent) by Moody’s Investors Service, Inc. (Moody’s) and “AA-” (Very Strong) by Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. (S&P).

The Company’s financial strength is also reflected in the ratings of its senior notes, subordinated debentures, capital securities issued by a subsidiary trust and commercial paper issued by NLIC. The following table summarizes these ratings as of December 31, 2006:

	A.M. Best	Moody’s	S&P
Senior notes	a-	A3	A-
Subordinated debentures	bbb+	Baa1	BBB+
Capital securities issued by a subsidiary trust	bbb+	Baa1	BBB
Commercial paper issued by NLIC	AMB-1	P-1	A-1+

These ratings are subject to periodic review by A.M. Best, Moody’s and S&P, and the maintenance of such ratings cannot be assured. If any rating is reduced from its current level, the Company’s financial position and results of operations could be adversely affected.

Competition

The Company competes with many other insurers as well as non-insurance financial services companies, including banks, broker/dealers and mutual funds, some of whom have greater financial resources, offer alternative products and, with respect to other insurers, have higher ratings than the Company. While no single

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company dominates the marketplace, many of the Company’s competitors have well-established national reputations and substantially greater financial resources and market share than the Company. Competition in the Company’s lines of business primarily is based on price, product features, commission structure, perceived financial strength, claims-paying ratings, customer and producer service, and name recognition.

Regulation

Regulation at State Level

As an insurance holding company, the Company is subject to regulation by the states in which its insurance subsidiaries are domiciled and/or transact business. Most states have enacted legislation that requires each insurance holding company and each insurance company in an insurance holding company system to register with the insurance regulatory authority of the insurance company’s state of domicile and annually furnish financial and other information concerning the operations of companies within the holding company system that materially affect the operations, management or financial condition of the insurers within such a system. Under such laws, a state insurance authority usually must approve in advance the direct or indirect acquisition of 10% or more of the voting securities of an insurance company domiciled in its state.

The Company is subject to the insurance holding company laws in the States of Ohio, Pennsylvania and Delaware. Under such laws, all transactions within an insurance holding company system affecting insurers must be fair and equitable, and each insurer’s policyholder surplus following any such transaction must be both reasonable in relation to its outstanding liabilities and adequate for its needs. These insurance holding company laws also require prior notice or regulatory approval of the change of control of an insurer or its holding company, material intercorporate transfers of assets within the holding company structure and certain other material transactions involving entities within the holding company structure.

The Company’s insurance subsidiaries are regulated and supervised in the jurisdictions in which they do business. Among other things, states regulate operating licenses; agent licenses; advertising and marketing practices; the form and content of insurance policies, including pricing; the type and amount of investments; statutory capital requirements; payment of dividends by insurance company subsidiaries; assessments by guaranty associations; affiliate transactions; and claims practices. These regulations are primarily intended to protect policyholders rather than shareholders. The Company cannot predict the effect that any proposed or future legislation may have on the financial condition or results of operations of the Company.

Insurance companies are required to file detailed annual and quarterly statutory financial statements with state insurance regulators 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. In addition, insurance regulators periodically examine an insurer’s financial condition, adherence to statutory accounting practices, and compliance with insurance department rules and regulations. Applicable state insurance laws, rather than federal bankruptcy laws, apply to the liquidation or restructuring of insurance companies. Changes in regulations, or in the interpretation of existing laws or regulations, may adversely impact pricing, reserve adequacy or exposure to litigation and could increase the costs of regulatory compliance by the Company’s insurance subsidiaries. Any proposed or future state legislation or regulations may negatively impact the Company’s financial position or results of operations.

As part of their routine regulatory oversight process, state insurance departments periodically conduct detailed examinations of the books, records and accounts of insurance companies domiciled in their states. Such examinations generally are conducted in cooperation with the insurance departments of multiple states under guidelines promulgated by the National Association of Insurance Commissioners (NAIC). The most recently completed examinations of NLIC and Nationwide Life and Annuity Insurance Company (NLAIC) were conducted by the Ohio Department of Insurance (ODI) for the five-year period ended December 31, 2001. This examination did not result in any significant issues or adjustments. The ODI is currently conducting an examination of NLIC, NLAIC and Nationwide Life Insurance Company of America (NLICA) for the five-year period ended December 31, 2006. The most recently completed examination of NLICA was conducted by the

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Pennsylvania Insurance Department (PID) for the five-year period ended December 31, 2002. This examination did not result in any significant issues or adjustments. The most recently completed examination of Nationwide Life and Annuity Company of America (NLACA) was conducted by the Delaware Insurance Department (DID) for the four-year period ended December 31, 2004. This examination did not result in any significant issues or adjustments.

State insurance regulatory authorities regularly make inquiries, hold investigations and administer market conduct examinations with respect to insurers’ compliance with applicable insurance laws and regulations. NLIC, NLAIC and NLACA are currently undergoing regulatory market conduct examinations in five states. The Company’s insurance subsidiaries continuously monitor sales, marketing and advertising practices and related activities of their agents and personnel and provide continuing education and training in an effort to ensure compliance with applicable insurance laws and regulations. There can be no assurance that any non-compliance with such applicable laws and regulations would not have a material adverse effect on the Company.

In December 2004, the NAIC adopted model legislation implementing new disclosure requirements with respect to compensation of insurance producers. In 2005, related state legislation was adopted in a few states and focused on the producer rather than the insurance company. Although the Company is not aware of regulatory or legislative developments or proposals regarding producer compensation disclosure that would have a material impact on its operations, the NAIC maintains a task force that will continue to review producer compensation disclosure requirements, and additional changes that could impact the Company are possible.

Regulation of Dividends and Other Payments from Insurance Subsidiaries

As an insurance holding company, NFS’ ability to meet debt service obligations and pay operating expenses and dividends depends primarily on the receipt of sufficient funds from its primary operating subsidiary, NLIC. The inability of NLIC to pay dividends to NFS in an amount sufficient to meet debt service obligations and pay operating expenses and dividends would have a material adverse effect on the Company. The payment of dividends by NLIC is subject to restrictions set forth in the insurance laws and regulations of the State of Ohio, its domiciliary state. The State of Ohio insurance laws require Ohio-domiciled life insurance companies to seek prior regulatory approval to pay a dividend or distribution of cash or other property if the fair market value thereof, together with that of other dividends or distributions made in the preceding 12 months, exceeds the greater of (1) 10% of statutory-basis policyholders’ surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. During the year ended December 31, 2006, NLIC paid dividends of $375.0 million to NFS. NLIC’s statutory capital and surplus as of December 31, 2006 was $2.68 billion, and statutory net income for 2006 was $537.5 million. As of January 1, 2007, NLIC could pay dividends to NFS totaling $162.5 million without obtaining prior approval. As of March 1, 2007, NLIC will be able to pay dividends to NFS totaling $232.5 million upon providing prior notice to the ODI. On February 21, 2007, NLIC declared an ordinary dividend of $232.5 million and an extraordinary dividend of $242.5 million, both payable to NFS in March 2007. NLIC will provide notice to the ODI of the ordinary dividend and seek prior approval from the ODI of the extraordinary dividend before paying these dividends to NFS.

The State of Ohio insurance laws also require insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. Earned surplus is defined under the State of Ohio insurance laws as the amount equal to the Company’s unassigned funds as set forth in its most recent statutory financial statements, including net unrealized capital gains and losses or revaluation of assets. Additionally, following any dividend, an insurer’s policyholder surplus must be reasonable in relation to the insurer’s outstanding liabilities and adequate for its financial needs. The payment of dividends by NLIC may also be subject to restrictions set forth in the insurance laws of the State of New York that limit the amount of statutory profits on NLIC’s participating policies (measured before dividends to policyholders) that can inure to the benefit of the Company and its shareholders.

The ability of NLICA to pay dividends to NFS is subject to regulation under Pennsylvania insurance law. Under Pennsylvania insurance laws, unless the PID either approves or does not disapprove payment within

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30 days after being notified, NLICA may not pay any cash dividends or other non-stock distributions to NFS during any 12-month period if the total payments exceed the greater of (1) 10% of statutory-basis policyholders’ surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. NLICA paid a dividend of $110.0 million to NFS in 2006. The statutory capital and surplus of NLICA as of December 31, 2006 was $654.3 million, and statutory net income for the year ended December 31, 2006 was $95.3 million. As of January 1, 2007, NLICA could not pay any dividends to NFS without obtaining prior approval.

NFS currently does not expect such regulator requirements to impair the ability of its insurance company subsidiaries to pay sufficient dividends in order for NFS to have the necessary funds available to meet its obligations.

Risk-Based Capital Requirements

In order to enhance the regulation of insurer solvency, the NAIC has adopted a model law to implement risk-based capital (RBC) requirements for life insurance companies. The requirements are designed to monitor capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The model law measures four major areas of risk facing life insurers: (1) the risk of loss from asset defaults and asset value fluctuation; (2) the risk of loss from adverse mortality (the relative incidence of death in a given time) and morbidity (the relative incidence of disability resulting from disease or physical impairment) experience; (3) the risk of loss from mismatching of asset and liability cash flow due to changing interest rates; and (4) business risks. Insurers having less statutory surplus than required by the RBC model formula will be subject to varying degrees of regulatory action depending on the level of capital inadequacy.

Based on the formula adopted by the NAIC, all of the Company’s insurance subsidiaries’ adjusted capital as of December 31, 2006 exceeded the levels at which the Company would be required to take corrective action.

Assessments Against and Refunds to Insurers

Insurance guaranty association laws exist in each state, the District of Columbia and the Commonwealth of Puerto Rico. Insurers doing business in any of these jurisdictions can be assessed for policyholder losses incurred by insolvent insurance companies. The amount and timing of any future assessment on or refund to the Company’s insurance subsidiaries under these laws cannot be reasonably estimated and are beyond the control of the Company and its insurance subsidiaries. A large part of the assessments paid by the Company’s insurance subsidiaries pursuant to these laws may be used as credits for a portion of the Company’s insurance subsidiaries’ premium taxes. For the years ended December 31, 2006, 2005 and 2004, net premium tax refunds received by the Company were immaterial.

Securities Laws

Certain of the Company’s insurance subsidiaries and certain policies and contracts offered by them are subject to regulation under the federal securities laws administered by the U.S. Securities and Exchange Commission (SEC) and under certain state securities laws. Certain separate accounts of the Company’s insurance subsidiaries are registered as investment companies under the Investment Company Act of 1940, as amended (Investment Company Act). Separate account interests under certain variable annuity contracts and variable insurance policies issued by the Company’s insurance subsidiaries are also registered under the Securities Act of 1933, as amended. Certain other subsidiaries of the Company are registered as broker/dealers under the Securities Exchange Act of 1934, as amended (Securities Exchange Act), and are members of, and subject to regulation by, the National Association of Securities Dealers.

Certain of the Company’s subsidiaries are investment advisors registered under the Investment Advisors Act of 1940, as amended. The investment companies managed by such subsidiaries are registered with the SEC under the Investment Company Act, and the shares of certain of these entities are qualified for sale in certain states and the District of Columbia. A subsidiary of the Company is registered with the SEC as a transfer agent. Certain subsidiaries of the Company are also subject to the SEC’s net capital rules.

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All aspects of the Company’s subsidiaries’ investment advisory activities are subject to applicable federal and state laws and regulations in the jurisdictions in which they conduct business. These laws and regulations primarily are intended to benefit investment advisory clients and investment company shareholders and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the transaction of business for failure to comply with such laws and regulations. In such event, the possible sanctions which may be imposed include the suspension of individual employees, limitations on the activities in which the investment advisor may engage, suspension or revocation of the investment advisor’s registration as an advisor, censure and fines.

Unitary Savings and Loan Holding Company Status

Nationwide Bank is a federal savings bank chartered by and subject to comprehensive regulation and periodic examination by the Office of Thrift Supervision of the U.S. Department of the Treasury (OTS). As a result of the Company’s ownership of Nationwide Bank, the Company is a unitary savings and loan holding company subject to regulation by the OTS and to the provisions of the Home Owners’ Loan Act of 1933 (Home Owners’ Loan Act). As a unitary savings and loan holding company, the Company generally is not restricted as to the types of business activities in which it may engage, so long as Nationwide Bank continues to meet the qualified thrift lender test (QTL Test). Under the Home Owners’ Loan Act, existing unitary savings and loan holding companies such as the Company are grandfathered with full powers to continue and expand their current activities. However, if the Company should fail to qualify as a unitary savings and loan holding company (as a result of failure of the QTL Test or otherwise), then the types of activities in which the Company and its non-savings association subsidiaries would be able to engage would generally be limited to those eligible for bank holding companies (subject, however, to the Company’s ability to elect status as a financial holding company under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999).

ERISA Considerations

On December 13, 1993, the U.S. Supreme Court issued its opinion in John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank, holding that certain assets in excess of amounts necessary to satisfy guaranteed obligations held by Hancock in its general account under a participating group annuity contract are “plan assets” and therefore subject to certain fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended (ERISA). ERISA requires that fiduciaries perform their duties solely in the interest of ERISA plan participants and beneficiaries, and with the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Court imposed ERISA fiduciary obligations to the extent that the insurer’s general account is not reserved to pay benefits under guaranteed benefit policies (i.e., benefits whose value would not fluctuate in accordance with the insurer’s investment experience).

The U.S. Secretary of Labor issued final regulations on January 5, 2000, providing guidance for the purpose of determining, in cases where an insurer issues one or more policies backed by the insurer’s general account to or for the benefit of an employee benefit plan, which assets of the insurer constitute plan assets for purposes of ERISA and the IRC. The regulations apply only with respect to a policy issued by an insurer to an ERISA plan on or before December 31, 1998. In the case of such a policy, most provisions of the regulations became applicable on July 5, 2001. Generally, where the basis of a claim is that insurance company general account assets constitute plan assets, no person will be liable under ERISA or the IRC for conduct occurring prior to July 5, 2001. However, certain provisions under the final regulations are applicable as follows: (1) certain contract termination features became applicable on January 5, 2000 if the insurer engages in certain unilateral actions; and (2) the initial and separate account disclosure provisions became applicable July 5, 2000. New policies issued after December 31, 1998 which are not guaranteed benefit policies subject the issuer to ERISA fiduciary obligations. Since NLIC issues fixed group annuity contracts that are backed by its general account and used to fund employee benefit plans, NLIC is subject to these requirements.

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Tax Legislation

The American Jobs Creation Act of 2004 modified and codified the rules applicable to nonqualified deferred compensation plans, a market in which the Company provides services and products. The Pension Protection Act of 2006 imposed new conditions that must be met in order for the death benefits from certain employer-owned life insurance contracts to continue to be received income tax free. In addition, numerous changes were made to simplify the administration and operation of retirement programs such as individual retirement accounts and IRC Section 401(k) plans. The IRS is expected to release new regulations regarding IRC Section 403(b) retirement arrangements and nonqualified deferred compensation arrangements in 2007. These legislative and regulatory changes may lessen the competitive advantage of certain of NLIC’s products compared to other investments. As a result, demand for certain of NLIC’s products and services may be negatively impacted.

The U.S. Congress periodically has considered possible legislation that would eliminate many of the tax benefits currently afforded to annuity products. In November 2005, the President’s Advisory Panel on Federal Tax Reform issued a report containing proposals, which if enacted as proposed, could materially reduce the tax advantages of purchasing variable annuity and cash value life insurance products as compared to other investment vehicles. The report included several proposals regarding the creation of tax-advantaged retirement and life savings accounts that were similar to proposals previously made by the Bush administration. Although the proposals have not been enacted, those proposals, or other similar proposals, could be introduced for enactment in future periods.

Employees

As of December 31, 2006, the Company had approximately 4,800 employees, none of which are covered by a collective bargaining agreement.

Available Information

The Company files electronically with the SEC its Current Reports on Form 8-K, Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and other reports, which are available on the SEC’s web site (http://www.sec.gov). In addition, all reports filed by the Company with the SEC may be read and copied at the SEC’s Public Reference Room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The Company also makes available these reports, free of charge, on its web site under the SEC Filings subsection of the Investor Relations area (http://www.nationwidefinancial.com). The Company’s Code of Conduct, Governance Guidelines, Audit Committee Charter, Compensation Committee Charter, Governance Committee Charter, Finance Committee Charter and other corporate governance documents are also available on the Company’s web site. Copies of these documents are also available from the Company free of charge. Requests for copies should be made to Mark Barnett, Vice President—Investor Relations, One Nationwide Plaza, Columbus, Ohio 43215-2220, or via telephone at 614-249-8437.

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ITEM 1A    RISK FACTORS

Changes in general economic and market conditions and interest rates may significantly affect the value of the Company’s investment portfolio.

The Company’s investment portfolio primarily consists of fixed-income securities and mortgage loans on real estate. The market values of these invested assets fluctuate depending on general economic and market conditions and the interest rate environment. For example, if interest rates rise, the investments generally will decrease in value. If interest rates decline, the investments generally will increase in value with the possible exception of mortgage-backed securities (MBSs), which may decline due to higher prepayments on the mortgages underlying the securities.

MBSs, including collateralized mortgage obligations (CMOs), are subject to prepayment risks that vary with interest rates, among other things. During periods of declining interest rates, MBSs generally prepay faster as the underlying mortgages are prepaid and/or refinanced by borrowers in order to take advantage of lower rates. MBSs that have an amortized cost greater than par (i.e., purchased at a premium) may incur a reduction in yield or a loss as a result of such prepayments. In addition, during such periods, the Company generally will be unable to reinvest the proceeds of any such prepayment at comparable yields. Conversely, during periods of rising interest rates, the frequency of prepayments generally decreases. MBSs that have an amortized value less than par (i.e., purchased at a discount) may incur a decrease in yield or a loss as a result of slower prepayments.

There can be no assurance that management will be able to successfully manage the negative impact of interest rate changes. Additionally, for business, regulatory or other reasons, the Company periodically may elect or be required to sell certain of its invested assets when their fair values are less than their original cost, resulting in realized capital losses.

Changes in interest rates and in the financial markets may reduce the Company’s interest spread income, earnings and sales.

The Company is exposed to various interest rate risks. Many of the products contain guarantees that require the Company to credit at least a minimum rate of interest to policyholders. In addition, for competitive reasons, the Company may at times continue to credit above-minimum interest rates to policyholders despite reductions in prevailing market interest rates. Current crediting rates for many of the Company’s individual annuity products are at or near the contractual minimum rates. Decreases in market interest rates would result in declines in the portfolio yield on investments backing the Company’s individual annuity products. A reduction in interest spread income, the difference between the interest rates that the Company credits policyholders and the yield the Company is able to earn on investments, may reduce earnings. If policyholders cancel their policies or withdraw the cash values of their policies to seek better investment yields in response to changing interest rates, the Company’s revenues are likely to decrease. If market interest rates decline, net investment income will decrease if higher-yielding fixed-income securities mature or are redeemed and the proceeds must be reinvested in lower-yielding securities.

Volatility in interest rates and equity markets could reduce consumer demand for the Company’s products and result in lower sales.

Changes in interest rates may negatively impact the Company’s liquidity.

Significant increases in prevailing interest rates may cause the Company’s policyholders to withdraw the cash value of their policies as they seek more attractive returns. If large numbers of policyholders or policyholders with large balances withdraw their policy values, the Company may be required to borrow funds or liquidate investments to raise the cash necessary to fund their withdrawals. Particularly in periods of volatile interest rates, liquidations can result in capital losses to the Company. Because volatile interest rates often make fixed-income investments like mortgages and privately placed bonds more difficult to sell, there is also a risk that the Company will find it difficult to raise the cash necessary to fund a very large amount of withdrawal activity.

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A decline in the equity markets can cause the values of the Company’s separate account assets to decline, reduce revenues, increase claims, increase payment obligations under guaranteed contracts and result in the accelerated amortization of deferred policy acquisition costs (DAC).

A significant source of revenues for the Company is derived from asset management fees, which are calculated as a percentage of separate account assets. Gains and losses in the equity markets will result in corresponding increases or decreases in separate account assets and asset management fee revenue. In addition, a decrease in separate account assets may decrease the Company’s expectations of future profit margins due to a decrease in asset fee revenue and/or an increase in guaranteed contract claims, which also may require the Company to accelerate the amortization of DAC. See Part II, Item 7A—Quantitative and Qualitative Disclosures About Market Risk—Equity Market Risk for a complete discussion of risk factors related to equity market risk, including guaranteed contracts.

Deviations from assumptions regarding future persistency, mortality, morbidity and interest rates used in calculating reserve amounts could have a material adverse impact on the Company’s consolidated net income.

The process of calculating reserve amounts for a life insurance organization involves the use of a number of assumptions, including those related to persistency (how long a contract stays with a company), mortality, morbidity and interest rates (the rates expected to be paid or received on financial instruments, including insurance or investment contracts). Actual results could differ significantly from those assumed. As such, deviations from one or more of these assumptions could result in material adverse impacts on the Company’s consolidated net income.

A decline in the Company’s financial strength ratings could adversely affect the Company’s operations.

See Part I, Item 1—Business—Ratings for a description of risk factors related to ratings.

The Company’s insurance subsidiaries are subject to extensive regulations designed to benefit or protect policyholders rather than the Company.

See Part I, Item 1—Business—Regulation—Regulation at State Level for a general description of the regulations designed to benefit or protect policyholders. Changes in regulations or in the interpretation of existing laws or regulations may adversely impact pricing, reserve adequacy or exposure to litigation and could increase the costs of regulatory compliance by the Company’s insurance subsidiaries. Any proposed or future state legislation or regulations may negatively impact the Company’s financial position or results of operations.

Certain changes in federal laws and regulations may adversely affect the Company’s financial position or results of operations.

Although the federal government does not directly regulate the insurance industry, federal legislation, administrative policies and court decisions may significantly and adversely affect certain areas of the Company’s business. In addition to product tax issues, these areas include pension and employee welfare benefit plan regulation, financial services regulation and taxation generally. For example, the following events could adversely affect the Company’s business:

• changes in laws such as ERISA, as amended, that apply to group annuities (see Part I, Item 1—Business —Regulation—ERISA Considerations for a complete discussion of ERISA);

• changes in tax laws that would reduce or eliminate the tax-deferred accumulation of earnings on the premiums paid by the holders of annuities and life insurance products;

• repeal of the federal estate tax;

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• changes in the availability of, or rules concerning the establishment and operation of, Section 401(k), 401(a), 403(b) and 457 plans or individual retirement accounts;

• changes in tax laws (see Part I, Item 1—Business—Regulation—Tax Legislation for a description of risk factors related to potential tax legislation); or

• changes in tax regulations, such as the proposed regulations that would alter the way tax sheltered annuities described in Section 403(b) of the IRC may be offered and sold.

Litigation or regulatory actions in connection with late trading, market timing, compensation and bidding arrangements, unsuitable sales and replacements, the use of finite reinsurance and/or other sales practices could have a material adverse effect on the Company.

See Part I, Item 3—Legal Proceedings for a description of litigation and regulatory actions. These and future litigation matters may negatively affect the Company by resulting in the payment of substantial awards or settlements, increasing legal and compliance costs, requiring the Company to change certain aspects of its business operations, diverting management attention from other business issues or harming the Company’s reputation with customers.

Certain changes in accounting and/or financial reporting standards issued by the Financial Accounting Standards Board (FASB), the SEC or other standard-setting bodies could have a material adverse impact on the Company’s financial position or results of operations.

The Company is subject to the application of U.S. generally accepted accounting principles (GAAP), which periodically are revised and/or expanded. As such, the Company periodically is required to adopt new or revised accounting and/or financial reporting standards issued by recognized accounting standard setters or regulators, including the FASB and the SEC. It is possible that future requirements could change the Company’s current application of GAAP, resulting in a material adverse impact on the Company’s financial position or results of operations.

The continued threat of terrorism and ongoing military and other actions may result in decreases in the Company’s consolidated net income, revenue and assets under management and may adversely affect the Company’s consolidated investment portfolio.

The continued threat of terrorism within the U.S. and abroad and the ongoing military and other actions and heightened security measures in response to these types of threats may cause significant volatility and declines in the U.S., European and other securities markets, loss of life, property damage, additional disruptions to commerce and reduced economic activity. Actual terrorist attacks could cause a decrease in the Company’s consolidated net income and/or revenue as a result of decreased economic activity and/or payment of claims. In addition, some of the assets in the Company’s investment portfolio may be adversely affected by declines in the securities markets and economic activity caused by the continued threat of terrorism, ongoing military and other actions and heightened security measures.

The Company cannot predict at this time whether and the extent to which industry sectors in which the Company maintains investments may suffer losses as a result of potential decreased commercial and economic activity, or how any such decrease might impact the ability of companies within the affected industry sectors to pay interest or principal on their securities, or how the value of any underlying collateral might be affected.

Although the Company does not believe that the continued threat of terrorist attacks will have any material impact on the Company’s financial strength or performance, the Company can offer no assurances that this threat, future terrorist-like events in the U.S. and abroad or military actions by the U.S. will not have a material adverse effect on the Company’s business, financial position or results of operations.

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The Company operates in a highly competitive industry, which can significantly impact operating results.

See Part I, Item 1—Business—Competition for a description of competitive factors affecting the Company. The Company’s revenues and profitability could be negatively impacted as a result of competition.

Unauthorized data access and other security breaches could have an adverse impact on the Company’s business and reputation.

Security breaches and other improper accessing of data in the Company’s facilities, networks or databases could result in loss or theft of data and information or systems interruptions that may expose the Company to liability and have an adverse impact on the Company’s business. Moreover, any compromise of the security of the Company’s data could harm the Company’s reputation and business. There can be no assurances that the Company will be able to implement security measures to prevent such security breaches.

ITEM 1B UNRESOLVED STAFF COMMENTS

None.

ITEM 2 PROPERTIES

Pursuant to an arrangement between NMIC and certain of its subsidiaries, during 2006 the Company leased on average approximately 905,000 square feet of office space in the three-building home office complex and in other offices in central Ohio. In addition, the Company leases approximately 120,000 square feet of office space in Berwyn, Pennsylvania (of which approximately 90,000 square feet are subleased) and owns approximately 160,000 square feet of office space in Newark, Delaware (of which approximately 14,000 square feet are subleased to an affiliate). Also, during 2005 NMIC announced plans to build and occupy a six-story, 130,000 square foot building in Columbus, Ohio. This building is still under construction. The Company expects to lease some of this space from NMIC. The Company believes that its present and planned facilities are adequate for the anticipated needs of the Company.

ITEM 3 LEGAL PROCEEDINGS

See Note 18 to the audited consolidated financial statements included in the F pages of this report for a discussion of legal proceedings.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of 2006, no matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise.

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PART II

ITEM 5 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Class A common stock of NFS is traded on the New York Stock Exchange under the symbol “NFS.” As of February 26, 2007, NFS had 116,563 registered shareholders of Class A common stock.

There is no established public trading market for the Company’s Class B common stock. All 91,778,717 shares of Class B common stock are owned by Nationwide Corp.

The following table presents quarterly high, low and closing sales prices of NFS Class A common stock and cash dividends declared on such shares for each quarter of 2006 and 2005:

	Market price						Dividends declared
Quarter ended	High		Low		Closing
March 31, 2006	$	44.94	$	41.73	$	43.02	$	0.23
June 30, 2006		44.50		42.46		44.08		0.23
September 30, 2006		48.76		43.71		48.10		0.23
December 31, 2006		54.57		47.83		54.20		0.23
March 31, 2005	$	38.47	$	35.35	$	35.90	$	0.19
June 30, 2005		38.71		33.66		37.94		0.19
September 30, 2005		40.41		37.80		40.05		0.19
December 31, 2005		44.00		37.99		44.00		0.19

See Part I, Item 1—Business—Regulation—Regulation of Dividends and Other Payments from Insurance Subsidiaries for information regarding restrictions on the ability of NFS’ insurance subsidiaries to pay dividends to NFS.

Pursuant to the Amended and Restated Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee Directors (Stock Retainer Plan), 101 shares of Class A common stock were issued by NFS during the fourth quarter of 2006, at an average price of $52.57 per share, to NFS directors who are not employees of NFS or its affiliates. This was a partial payment of the annual stock retainer paid by NFS to such directors in consideration of serving as directors of the Company. The annual stock retainer consists of a grant of deferred stock units under the Stock Retainer Plan having a value of $90,000. In addition, the directors receive an annual cash retainer of $45,000 (paid in monthly installments). The Chairman of the Board receives a supplemental annual retainer of $40,000, paid one-half in cash and one-half in shares of the Company’s Class A common stock, for his additional duties. This supplemental retainer of cash and stock is also paid in monthly installments. The issuance of such shares in partial payment of the annual retainer is exempt from registration under the Securities Act of 1933, as amended.

See Note 14 to the audited consolidated financial statements included in the F pages of this report for a description of the Company’s share repurchase program activity.

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The following table summarizes the information required by Item 703 of Regulation S-K for purchases of NFS’ equity securities by NFS or any affiliated purchasers, as defined in Rule 10b-18(a)(3) under the Securities Exchange Act, during the Company’s fourth quarter:

Period	(a) Total number of shares (or units) purchased	(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs	(d) Maximum number (or approximate value) of shares (or units) that may yet be purchased under the plans or programs
October 2006	—		N/A	—	$	259.1
November 2006	413,600	$	52.11	413,600		237.5
December 2006	3,952,950		51.90	3,952,950		32.4
Total	4,366,550		51.92	4,366,550

See Part III, Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for additional information required by this item.

The following graph shows a comparison of the Company’s cumulative total shareholder return along with the S&P 500 and an index of peer companies selected by the Company for the past five years. The following companies are included in the current peer group: Aflac Incorporated; Genworth Financial, Inc.; Hartford Financial Services Group, Inc.; Lincoln National Corporation; Manulife Financial Corporation; MetLife Inc.; Protective Life Corporation; Principal Financial Group; and Prudential Financial, Inc. Companies included in the peer group have business operations similar to the Company and are considered to be significant competitors of the Company.

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The graph plots the changes in the value of an initial $100 investment over the indicated time periods, assuming reinvestment of all dividends. Returns of the index of peer companies have been weighted according to their respective aggregate market capitalization at the beginning of each period shown on the graph.

Comparison of Five-Year Cumulative Total Return

Nationwide Financial Services, Inc. S&P 500, Peer Group

(Performance through December 31, 2006)

* Assumes $100 invested at the close of trading on December 31, 2001 in Nationwide Financial Services, Inc. Class A common stock, S&P 500 and Peer Group.

	12/31/2001		12/31/2002		12/31/2003	12/31/2004	12/31/2005		12/31/2006
NFS	$	100.00	$	70.19	$82.40	$97.18	$	114.04	$	143.25
S&P 500		100.00		76.63	96.85	105.56		108.73		123.54
Peer Group		100.00		92.87	119.90	151.42		189.26		218.22

There can be no assurance that the Company’s stock performance will continue into the future with the same or similar trends depicted in the preceding graph. The Company will not make or endorse any predictions as to future stock performance.

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ITEM 6     SELECTED CONSOLIDATED FINANCIAL DATA

Five-Year Summary

	Years ended or as of December 31,
(in millions, except per share amounts)	2006		2005		2004		2003		2002
Statements of Income Data:
Total revenues	$	4,415.5	$	4,307.9	$	4,076.1	$	3,863.8	$	3,243.9
Income from continuing operations		713.8		623.4		507.7		399.7		145.7
Net income		713.8		598.7		502.0		397.8		144.2
Earnings from continuing operations per common share:
Basic	$	4.76	$	4.08	$	3.34	$	2.63	$	1.10
Diluted	$	4.74	$	4.06	$	3.32	$	2.62	$	1.10
Earnings per common share:
Basic	$	4.76	$	3.92	$	3.30	$	2.62	$	1.09
Diluted	$	4.74	$	3.90	$	3.28	$	2.61	$	1.09
Weighted average common shares outstanding:
Basic		149.9		152.9		152.1		151.8		132.4
Diluted		150.7		153.6		152.9		152.3		132.6
Cash dividends declared per common share	$	0.92	$	0.76	$	0.72	$	0.52	$	0.51
Balance Sheets Data:
Total assets	$	119,411.6	$	116,159.9	$	116,950.6	$	111,088.2	$	95,560.3
Long-term debt		1,398.5		1,398.0		1,406.0		1,405.6		1,197.6
Shareholders’ equity		5,538.3		5,350.4		5,215.1		4,875.4		4,443.3
Book value per common share	$	37.93	$	35.08	$	34.20	$	32.10	$	29.25
Segment Data:
Customer funds managed and administered:
Individual Investments	$	52,963.6	$	51,227.6	$	52,481.9	$	49,333.9	$	40,896.5
Retirement Plans		97,418.9		82,998.5		76,661.2		64,224.3		45,524.8
Individual Protection		19,686.8		17,388.6		15,683.0		13,897.1		12,158.9
Corporate and Other		4,821.8		3,998.2		4,401.6		4,606.3		4,273.6
Total	$	174,891.1	$	155,612.9	$	149,227.7	$	132,061.6	$	102,853.8
Pre-tax operating earnings (loss):
Individual Investments	$	210.8	$	237.0	$	234.4	$	182.9	$	(120.5	)
Retirement Plans		216.5		187.8		180.3		152.8		142.5
Individual Protection		274.8		258.2		242.7		215.5		188.1
Corporate and Other		67.7		55.7		58.6		54.8		18.2
Sales:
Individual Investments	$	5,391.1	$	4,109.2	$	5,338.5	$	6,738.8	$	7,330.3
Retirement Plans		11,732.7		10,851.7		9,805.8		8,400.9		7,424.7
Individual Protection		1,962.0		1,825.2		1,766.8		1,722.5		1,543.3
Total	$	19,085.8	$	16,786.1	$	16,911.1	$	16,862.2	$	16,298.3

As described in Part II, Item 7—MD&A—Overview—Discontinued Operations, the results of operations of The 401(k) Company are reflected as discontinued operations for 2006 and all prior years. In addition, the results of operations of Cap Pro Holding, Inc. (Cap Pro), Nationwide Financial Services (Bermuda), Ltd. (NFSB) and William J. Lynch & Associates, Inc. (TBG Lynch) are reflected as discontinued operations for 2005 and all prior years.

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ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE OF CONTENTS

FORWARD-LOOKING INFORMATION	25
OVERVIEW	26
CRITICAL ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING STANDARDS	29
RESULTS OF OPERATIONS	33
SALES	36
BUSINESS SEGMENTS	42
LIQUIDITY AND CAPITAL RESOURCES	60
CONTRACTUAL OBLIGATIONS AND COMMITMENTS	63
OFF-BALANCE SHEET TRANSACTIONS	65
INVESTMENTS	65

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Forward-Looking Information

The information included herein contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the results of operations and businesses of Nationwide Financial Services, Inc. and subsidiaries (NFS, or collectively, the Company). Whenever used in this report, words such as “anticipate,” “estimate,” “expect,” “intend,” “plan,” “believe,” “project,” “target” and other words of similar meaning are intended to identify such forward-looking statements. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward-looking statements include, among others, the following possibilities:

(i) change in Nationwide Corporation’s control of the Company through its beneficial ownership of 94.4% of the combined voting power of all the outstanding common stock and 62.9% of the economic interest in the Company;

(ii) NFS’ primary reliance, as a holding company, on dividends from its subsidiaries to meet debt service obligations and the applicable regulatory restrictions on the ability of NFS’ subsidiaries to pay such dividends;

(iii) the potential impact on the Company’s reported net income and related disclosures that could result from the adoption of certain accounting and/or financial reporting standards issued by the Financial Accounting Standards Board, the SEC or other standard-setting bodies;

(iv) tax law changes impacting the tax treatment of life insurance and investment products;

(v) repeal of the federal estate tax;

(vi) heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new and existing competitors;

(vii) adverse state and federal legislation and regulation, including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements; restrictions on mutual fund distribution payment arrangements such as revenue sharing and 12b-1 payments; and regulation changes resulting from industry practice investigations;

(viii) failure to expand distribution channels in order to obtain new customers or failure to retain existing customers;

(ix) inability to carry out marketing and sales plans, including, among others, development of new products and/or changes to certain existing products and acceptance of the new and/or revised products in the market;

(x) changes in interest rates and the equity markets causing a reduction of investment income and/or asset fees, an acceleration of the amortization of DAC and/or value of business acquired (VOBA), a reduction in separate account assets or a reduction in the demand for the Company’s products;

(xi) reduction in the value of the Company’s investment portfolio as a result of changes in interest rates and yields in the market as well as geopolitical conditions and the impact of political, regulatory, judicial, economic or financial events, including terrorism, affecting the market generally and companies in the Company’s investment portfolio specifically;

(xii) general economic and business conditions which are less favorable than expected;

(xiii) competitive, regulatory or tax changes that affect the cost of, or demand for, the Company’s products;

(xiv) unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;

(xv) settlement of tax liabilities for amounts that differ significantly from those recorded on the balance sheets;

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(xvi) deviations from assumptions regarding future persistency, mortality (including as a result of the outbreak of a pandemic illness, such as Avian Flu), morbidity and interest rates used in calculating reserve amounts and in pricing the Company’s products;

(xvii) adverse litigation results and/or resolution of litigation and/or arbitration or investigation results that could result in monetary damages or impact the manner in which the Company conducts its operations; and

(xviii) adverse consequences, including financial and reputation costs, regulatory problems and potential loss of customers resulting from failure to meet privacy regulations and/or protect the Company’s customers’ confidential information.

Overview

Following is management’s discussion and analysis of financial condition and results of operations of the Company for the three years ended December 31, 2006. This discussion should be read in conjunction with the audited consolidated financial statements and related notes beginning on page F-1 of this report.

See Part I, Item 1—Business—Overview and Part I, Item 1—Business—Capital Stock Transactions for a description of the Company and its ownership structure.

Business Segments

Management views the Company’s business primarily based on its underlying products and uses this basis to define its four reportable segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other.

The primary segment profitability measure that management uses is pre-tax operating earnings, which is calculated by adjusting income from continuing operations before federal income taxes and discontinued operations to exclude: (1) net realized gains and losses on investments, hedging instruments and hedged items, except for operating items (periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations); and (2) the adjustment to amortization of DAC and VOBA related to net realized gains and losses.

See Part I, Item 1—Business—Business Segments for a description of the components of each segment.

The following table summarizes pre-tax operating earnings by segment for the years ended December 31:

(dollars in millions)	2006		2005		Change	2004		Change
Individual Investments	$	210.8	$	237.0	(11)%	$	234.4	1%
Retirement Plans		216.5		187.8	15%		180.3	4%
Individual Protection		274.8		258.2	6%		242.7	6%
Corporate and Other		67.7		55.7	22%		58.6	(5)%

Revenues and Expenses

The Company earns revenues and generates cash primarily from policy charges, life insurance premiums and net investment income. Policy charges include asset fees, which are earned primarily from separate account values generated from the sale of individual and group variable annuities and investment life insurance products; cost of insurance charges earned on universal life insurance products, which are assessed on the amount of insurance in force in excess of the related policyholder account value; administrative fees, which include fees charged per contract on a variety of the Company’s products and premium loads on universal life insurance

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products; and surrender fees, which are charged as a percentage of premiums withdrawn during a specified period for annuity and certain life insurance contracts. Net investment income includes earnings on investments supporting fixed annuities, the MTN program and certain life insurance products, and earnings on invested assets not allocated to product segments, all net of related investment expenses. Other income includes asset fees, administrative fees, commissions and other income earned by subsidiaries of the Company that provide administrative, marketing and distribution services.

Management makes decisions concerning the sale of invested assets based on a variety of market, business, tax and other factors. All realized gains and losses generated by these sales, charges related to other-than-temporary impairments of available-for-sale securities and other investments, and changes in valuation allowances on mortgage loans on real estate are reported in realized gains and losses on investments, hedging instruments and hedged items. Also included are changes in the fair values of derivatives qualifying as fair value hedges and the related changes in the fair values of hedged items; the ineffective, or excluded, portion of cash flow hedges; changes in the fair values of derivatives that do not qualify for hedge accounting treatment; and periodic net coupon settlements on non-qualifying derivatives.

The Company’s primary expenses include interest credited to policyholder account values, life insurance and annuity benefits, amortization of DAC and general business operating expenses. Interest credited principally relates to individual and group fixed annuities, funding agreements backing the Company’s MTN program and certain life insurance products. Life insurance and annuity benefits include policyholder benefits in excess of policyholder account values for universal life and individual deferred annuities and net claims and provisions for future policy benefits for traditional life insurance products and immediate annuities.

The Company regularly evaluates and adjusts the DAC balance when actual gross profits in a given reporting period vary from management’s initial estimates, with a corresponding charge or credit to current period earnings. This process is referred to by the Company as a “true-up”, which is performed, and the resulting impact recognized, on a quarterly basis. Additionally, the Company regularly evaluates its assumptions regarding the future estimated gross profits used as a basis for amortization of DAC and adjusts the total amortization recorded to date by a charge or credit to earnings if evidence suggests that these future assumptions and estimates should be revised. This process is referred to by the Company as “unlocking.” The Company regularly monitors its actual experience with factors impacting its assumptions about future expected gross profits and other relevant internal and external information regarding those assumptions and unlocks as such information and analysis warrants.

Profitability

The Company’s profitability largely depends on its ability to effectively price and manage risk on its various products, administer customer funds and control operating expenses. Lapse rates on existing contracts also impact profitability. The lapse rate and distribution of lapses affects surrender charges and impacts DAC amortization assumptions when lapse experience changes significantly.

In particular, the Company’s profitability is driven by fee income on separate account products, general and separate account asset levels, and management’s ability to manage interest spread income. While asset fees are largely at guaranteed annual rates, amounts earned vary directly with the underlying performance of the separate accounts. Interest spread income is comprised of net investment income, excluding any applicable allocated charges for invested capital, less interest credited to policyholder account values. Interest spread income can vary depending on crediting rates offered by the Company; performance of the investment portfolio, including the rate of prepayments; changes in market interest rates; the competitive environment; and other factors.

In addition, life insurance profits are significantly impacted by mortality, morbidity and persistency experience.

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Discontinued Operations

During December 2006, the Company announced an agreement to sell The 401(k) Company for $115.0 million in cash, subject to a post-closing adjustment. The Company expects to record a gain on this transaction when it is finalized during the first quarter of 2007. During the year ended December 31, 2005, management decided to discontinue the following operations: (1) Cap Pro, a majority-owned subsidiary of NFS that provided broker/dealer, registered investment advisor and insurance agency services to producers of certain certified public accounting firms; (2) NFSB, a wholly-owned subsidiary of NFS that sold variable and fixed annuity products in offshore markets; and (3) TBG Lynch, a wholly-owned subsidiary of TBG Financial that distributed BOLI products. The results of operations of The 401(k) Company for 2006 and all prior years and for Cap Pro, NFSB and TBG Lynch for 2005 and all prior years are reflected as discontinued operations. However, the “Other Data” sections of the tables in the subsequent segment portions of MD&A include amounts applicable to the operations that were discontinued in 2006 and 2005. See Note 2(n) to the audited consolidated financial statements included in the F pages of this report for additional information on discontinued operations.

Cumulative Effect of Adoption of Accounting Principle

The Company adopted Statement of Position (SOP) 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1), effective January 1, 2004, which resulted in a $3.4 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle. See Note 3 to the audited consolidated financial statements included in the F pages of this report for a complete description of SOP 03-1.

Nationwide Bank

The Company made an application to the OTS to expand the powers of NTC to include the full range of activities permissible for savings associations under the Home Owners’ Loan Act of 1933 and OTS regulations and to operate under the name Nationwide Bank. The OTS approved this application on April 18, 2006. Nationwide Bank and Nationwide Federal Credit Union (NFCU) entered into an Agreement and Plan of Merger, dated as of June 16, 2006, pursuant to which Nationwide Bank would acquire 100% of the ownership interests in NFCU for $79.0 million in cash. The merger transaction was subject to a vote of the members of NFCU and approvals by certain federal regulatory agencies, including the OTS, the National Credit Union Administration (NCUA) and the Federal Deposit Insurance Corporation. The application to seek member vote on the proposed merger was approved by the NCUA on July 20, 2006. The members of NFCU approved the transaction at a special meeting on November 1, 2006. On November 6, 2006, the NCUA approved the methods and procedures used in the membership vote. On December 1, 2006 and December 15, 2006, Nationwide Bank received final regulatory approvals from the Federal Deposit Insurance Corporation and the OTS, respectively, to finalize its merger with NFCU. Closing and payment of merger consideration occurred on January 8, 2007. The merger consideration was distributed to NFCU members on a pro rata basis according to the members’ deposit account balances as of March 31, 2006.

Acquisition

On November 2, 2006, NFS and NMIC announced that they were in discussions regarding the Philadelphia-based retail asset management operations of NWD. On December 21, 2006, NFS and NMIC announced that they had reached an agreement outlining the preliminary terms for NFS’ purchase of NWD. On February 2, 2007, NFS entered into a stock purchase agreement with Nationwide Corporation. Total consideration in the transaction will be $225.0 million in cash, plus the value of NWD’s tangible shareholders’ equity at closing. The transaction is expected to be completed during the second quarter of 2007 and is subject to the approval of the shareholders of the affected NWD funds to be acquired by NFS.

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Critical Accounting Policies and Recently Issued Accounting Standards

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ significantly from those estimates.

The Company’s most critical estimates include those used to determine the following: the balance, recoverability and amortization of DAC for investment and universal life insurance products; impairment losses on investments; valuation allowances for mortgage loans on real estate; the liability for future policy benefits and claims; and federal income tax provision.

Note 2 and Note 3 to the audited consolidated financial statements included in the F pages of this report provide a summary of significant accounting policies and a discussion of recently issued accounting standards, respectively.

Deferred Policy Acquisition Costs for Investment and Universal Life Insurance Products

The Company has deferred certain costs of acquiring investment and universal life insurance products business, principally commissions, certain expenses of the policy issue and underwriting department, and certain variable sales expenses that relate to and vary with the production of new and renewal business. Investment products primarily consist of individual and group variable and fixed deferred annuities. Universal life insurance products include universal life insurance, variable universal life insurance, COLI and other interest-sensitive life insurance policies. DAC is subject to recoverability testing in the year of policy issuance and loss recognition testing at the end of each reporting period.

For investment and universal life insurance products, DAC is being amortized with interest over the lives of the policies in relation to the present value of estimated gross profits from projected interest margins, asset fees, cost of insurance charges, administration fees, surrender charges, and net realized gains and losses less policy benefits and policy maintenance expenses. The DAC asset related to investment products and universal life insurance products is adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale, as described in Note 2(b) to the audited consolidated financial statements included in the F pages of this report.

The most significant assumptions that are involved in the estimation of future gross profits include future net separate account performance, surrender/lapse rates, interest margins and mortality. The Company’s long-term assumption for net separate account performance is currently 8% growth per year. If actual net separate account performance varies from the 8% assumption, the Company assumes different performance levels over the next three years such that the mean return equals the long-term assumption. This process is referred to as a reversion to the mean. The assumed net separate account return assumptions used in the DAC models are intended to reflect what is anticipated. However, based on historical returns of the S&P 500 Index, and as part of its pre-set parameters, the Company’s reversion to the mean process generally limits returns to 0-15% during the three-year reversion period.

Changes in assumptions can have a significant impact on the amount of DAC reported for investment products and universal life insurance products and their related amortization patterns. In the event actual experience differs from assumptions or future assumptions are revised, the Company is required to record an increase or decrease in DAC amortization expense, which could be significant. In general, increases in the estimated general and separate account returns result in increased expected future profitability and may lower the rate of DAC amortization, while increases in lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.

Management evaluates the appropriateness of the individual variable annuity DAC balance within pre-set parameters. These parameters are designed to appropriately reflect the Company’s long-term expectations with respect to individual variable annuity contracts while also evaluating the potential impact of short-term

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experience on the Company’s recorded individual variable annuity DAC balance. If the recorded balance of individual variable annuity DAC falls outside of these parameters for a prescribed period of time, or if the recorded balance falls outside of these parameters and management determines it is not reasonably possible to get back within the parameters during this period of time, assumptions are required to be unlocked and DAC is recalculated using revised best estimate assumptions. If DAC assumptions were unlocked and revised, the Company would continue to use the reversion to the mean process.

For variable annuity products, the DAC balance is sensitive to the effects of changes in the Company’s estimates of gross profits, primarily due to the significant portion of the Company’s gross profits that are dependent upon the rate of return on assets held in separate accounts. This rate of return influences fees earned by the Company from these products and costs incurred by the Company associated with minimum contractual guarantees, as well as other sources of future expected gross profits. As previously stated, the Company’s long-term assumption for net separate account performance is currently 8% growth per year. In its ongoing evaluation of this assumption, the Company monitors its historical experience, market information and other relevant trends. To demonstrate the sensitivity of both the Company’s variable annuity product DAC balance, which was approximately $1.8 billion in aggregate at December 31, 2006, and related amortization, a 1% increase (to 9%) or decrease (to 7%) in the long-term assumption for net separate account performance would result in an approximately $20 million net increase or net decrease, respectively, in DAC amortization over the following year. These fluctuations are reasonably likely to occur. The information provided above considers only changes in the assumption for long-term net separate account performance and excludes changes in other assumptions used in the Company’s evaluation of DAC.

For other investment and universal life insurance products, DAC is adjusted each quarter to reflect revised best estimate assumptions, including the use of a reversion to the mean methodology over the next three years as it relates to net separate account performance. Any resulting DAC true-up and unlocking adjustments are reflected currently in the consolidated statements of income.

Impairment Losses on Investments

Management regularly reviews each investment in its fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.

Under the Company’s accounting policy for equity securities and debt securities that can be contractually prepaid or otherwise settled in a way that may limit the Company’s ability to fully recover cost, an impairment is deemed to be other-than-temporary unless the Company has both the ability and intent to hold the investment until the security’s forecasted recovery and evidence exists indicating that recovery will occur in a reasonable period of time. Also, for such debt securities management estimates cash flows over the life of purchased beneficial interests in securitized financial assets. If management estimates that the fair value of its beneficial interest is not greater than or equal to its carrying value based on current information and events, and if there has been an adverse change in estimated cash flows since the last revised estimate (considering both timing and amount), then the Company recognizes an other-than-temporary impairment and writes down the purchased beneficial interest to fair value.

For other debt securities, an other-than-temporary impairment charge is taken when the Company does not have the ability and intent to hold the security until the forecasted recovery or if it is no longer probable that the Company will recover all amounts due under the contractual terms of the security. Many criteria are considered during this process including, but not limited to, the current fair value as compared to cost or amortized cost, as appropriate, of the security; the amount and length of time a security’s fair value has been below cost or amortized cost; specific credit issues and financial prospects related to the issuer; management’s intent to hold or dispose of the security; and current economic conditions.

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Other-than-temporary impairment losses result in a permanent reduction to the cost basis of the underlying investment.

Impairment losses are recorded on investments in long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts.

Significant changes in the factors management considers when evaluating investments for impairment losses, including significant deterioration in the credit worthiness of individual issuers, could result in a significant change in impairment losses reported in the consolidated financial statements.

Valuation Allowances for Mortgage Loans on Real Estate

The Company provides valuation allowances for impairments of mortgage loans on real estate based on a review by portfolio managers. Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When management determines that a loan is impaired, a provision for loss is established equal to the difference between the carrying value and the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, if the loan is collateral dependent. In addition to the valuation allowance on specific loans, the Company maintains an unallocated allowance for probable losses inherent in the loan portfolio as of the balance sheet date, but not yet specifically identified by loan. Changes in the valuation allowance are recorded in net realized gains and losses on investments, hedging instruments and hedged items. Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans on real estate is included in net investment income in the period received.

The valuation allowance account for mortgage loans on real estate is maintained at a level believed adequate by management and reflects management’s best estimate of probable credit losses, including losses incurred at the balance sheet date but not yet identified by specific loan. Management’s periodic evaluation of the adequacy of the allowance for losses is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors.

Significant changes in the factors management considers in determining the valuation allowance for mortgage loans on real estate could result in a significant change in the valuation allowance reported in the consolidated financial statements.

Future Policy Benefits and Claims

The process of calculating reserve amounts for a life insurance organization involves the use of a number of assumptions, including those related to persistency, mortality, morbidity and interest rates.

The Company calculates its liability for future policy benefits and claims for investment products in the accumulation phase and universal life and variable universal life insurance policies as the policy account balance, which represents participants’ net premiums and deposits plus investment performance and interest credited less applicable contract charges.

The Company’s liability for funding agreements to an unrelated third party trust equals the balance that accrues to the benefit of the contractholder, including interest credited. The funding agreements constitute insurance obligations and are considered annuity contracts under Ohio insurance laws.

The liability for future policy benefits and claims for traditional life insurance policies was calculated by the net level premium method using interest rates varying from 2.0% to 10.5% and estimates of mortality, morbidity, investment yields and withdrawals that were used or being experienced at the time the policies were issued.

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The liability for future policy benefits for payout annuities was calculated using the present value of future benefits and maintenance costs discounted using interest rates varying generally from 3.0% to 13.0%.

Federal Income Taxes

Management provides for federal income taxes based on amounts it believes it ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization of certain tax credits differs from estimates, management may be required to significantly change the provision for federal income taxes recorded in the consolidated financial statements. Any such change could significantly affect the amounts reported in the consolidated statements of income.

The Company’s federal income tax returns are routinely audited by the Internal Revenue Service (IRS). Management has established tax reserves representing its best estimate of additional amounts it may be required to pay if certain tax positions it has taken are challenged and ultimately denied by the IRS. These reserves are reviewed regularly and are adjusted as events occur that management believes impact its liability for additional taxes, such as lapsing of applicable statutes of limitations, conclusion of tax audits or substantial agreement on the deductibility/non-deductibility of uncertain items, additional exposure based on current calculations, identification of new issues, release of administrative guidance or rendering of a court decision affecting a particular tax issue. Management believes its tax reserves reasonably provide for potential assessments that may result from IRS examinations and other tax-related matters for all open tax years.

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Results of Operations

2006 Compared to 2005

The following table summarizes the Company’s consolidated results of operations for the years ended December 31:

(dollars in millions)	2006		2005			Change
Revenues:
Policy charges:
Asset fees	$	691.2	$	639.9		8%
Cost of insurance charges		402.0		388.5		3%
Administrative fees		139.1		114.9		21%
Surrender fees		83.7		98.2		(15)%
Total policy charges		1,316.0		1,241.5		6%
Traditional life insurance and immediate annuity premiums		441.5		399.9		10%
Net investment income		2,298.5		2,343.9		(2)%
Net realized gains on investments, hedging instruments and hedged items		9.1		20.8		NM
Other income		350.4		301.8		16%
Total revenues		4,415.5		4,307.9		2%
Benefits and expenses:
Interest credited to policyholder account values		1,380.3		1,380.9		—
Life insurance and annuity benefits		646.8		574.9		13%
Policyholder dividends on participating policies		90.7		107.3		(15)%
Amortization of DAC		462.9		480.2		(4)%
Amortization of VOBA		46.0		45.0		2%
Interest expense		103.7		108.0		(4)%
Debt extinguishment costs		—		21.7		NM
Other operating expenses		906.2		833.8		9%
Total benefits and expenses		3,636.6		3,551.8		2%
Income from continuing operations before federal income tax expense		778.9		756.1		3%
Federal income tax expense		65.1		132.7		(51)%
Income from continuing operations		713.8		623.4		15%
Discontinued operations, net of taxes		—		(24.7	)	NM
Net income	$	713.8	$	598.7		19%

The increase in net income primarily was driven by a tax benefit of $114.2 million recorded during the second quarter of 2006 compared to tax benefits and recoverables totaling $48.2 million recorded during the third quarter of 2005. In addition, the Company recorded higher income from continuing operations before federal income tax expense primarily due to increases in policy charges, other income, and traditional life insurance and immediate annuity premiums. The comparison to the prior year also benefited from debt extinguishment costs incurred in 2005. Higher other operating expenses and life insurance and annuity benefits, combined with lower interest spread income, partially offset the overall increase in income from continuing operations before federal income tax expense.

Through June 2006, the Company’s federal income tax returns for tax years 2000-2002 were under IRS examination pursuant to a routine audit. In accordance with its regular practice, management established tax reserves representing its best estimate of additional amounts the Company could be required to pay if certain positions it had taken were challenged and ultimately denied by the IRS with respect to these tax years. These

33

reserves are reviewed regularly and are adjusted as events occur that management believes impacts the Company’s liability for additional taxes, such as lapsing of applicable statutes of limitations; conclusion of tax audits or substantial agreement on the deductibility/non-deductibility of uncertain items; additional exposure based on current calculations; identification of new issues; release of administrative guidance; or rendering of a court decision affecting a particular tax issue. A significant component of the Company’s tax reserve as of December 31, 2005 was related to the separate account dividends received reduction (DRD).

In July 2006, the Company reached substantial agreement with the IRS on all open issues for tax years 2000-2002, including issues related to the DRD. Accordingly, the Company revised its estimate of amounts that may be due in connection with certain tax positions, including the DRD, for all open tax years. As a result of the revised estimate, $114.2 million of tax reserves were released into earnings during the second quarter of 2006.

During the third quarter of 2006, the Company recorded $8.3 million of net federal income tax expense adjustments primarily related to differences between the 2005 estimated tax liability and the amounts reported on the Company’s 2005 tax returns. During the third quarter of 2005, the Company refined its separate account DRD estimation process. As a result, the Company identified and recorded additional federal income tax benefits and recoverables in the amount of $42.6 million related to all tax years (2000 – 2005) that were open at that time. Also in the third quarter of 2005, the Company recorded $5.6 million of net benefit adjustments primarily related to differences between the 2004 estimated tax liability and the amounts reported on the Company’s 2004 tax returns. Because of the impact of this activity, along with the 2006 reserve release described above, the effective tax rates in 2006 and 2005 are not comparable.

The increase in policy charges was driven by higher asset fees and administrative fees. Asset fees rose due to increases in both the average asset fee rate charged and average separate account values within the Individual Investments segment. The average variable asset fee rate increased as new business sold with living benefit riders and corresponding higher fee rates influenced the overall average rate. Administrative fees increased primarily in the Retirement Plans segment due to a policy adjustment related to the surrender of a group fixed annuity contract. See Part II—Item 7—MD&A—Business Segments—Retirement Plans for additional information.

Higher other income primarily was attributable to the Retirement Plans segment due to higher average variable assets in the private sector NTC business driven by strong market performance.

The increase in traditional life insurance and immediate annuity premiums was due to higher interest rates relative to a year ago, which created a favorable environment for immediate annuity product sales in the Individual Investments segment.

During the third quarter of 2005, the Company redeemed certain long-term debt holdings and incurred non-cash debt extinguishment costs of $21.7 million. See Part II—Item 7—MD&A—Business Segments—Corporate and Other for further information.

Most of the increase in other operating expenses was attributable to the Retirement Plans segment due to increased trail commissions from higher average variable assets and investments in technology, sales processes and infrastructure.

Higher life insurance and annuity benefits primarily occurred within the Individual Investments segment due to increased immediate annuity benefit reserves, which were driven by growth in sales relative to a year ago and an increasing proportion of business with living benefit features. This increase is consistent with the corresponding increase in immediate annuity premiums and asset fees described above.

Interest spread income decreased primarily within the Individual Investments segment due to a decline in general account assets caused by fixed annuity net outflows and lower income from mortgage loan prepayment penalties and bond call premiums.

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2005 Compared to 2004

The following table summarizes the Company’s consolidated results of operations for the years ended December 31:

(dollars in millions)	2005			2004			Change
Revenues:
Policy charges:
Asset fees	$	639.9		$	620.7		3%
Cost of insurance charges		388.5			379.7		2%
Administrative fees		114.9			117.9		(3)%
Surrender fees		98.2			104.3		(6)%
Total policy charges		1,241.5			1,222.6		2%
Traditional life insurance and immediate annuity premiums		399.9			402.7		(1)%
Net investment income		2,343.9			2,231.7		5%
Net realized gains (losses) on investments, hedging instruments and hedged items		20.8			(32.2	)	NM
Other income		301.8			251.3		20%
Total revenues		4,307.9			4,076.1		6%
Benefits and expenses:
Interest credited to policyholder account values		1,380.9			1,328.3		4%
Life insurance and annuity benefits		574.9			548.6		5%
Policyholder dividends on participating policies		107.3			101.4		6%
Amortization of DAC		480.2			430.4		12%
Amortization of VOBA		45.0			52.3		(14)%
Interest expense		108.0			102.4		5%
Debt extinguishment costs		21.7			—		NM
Other operating expenses		833.8			837.6		(1)%
Total benefits and expenses		3,551.8			3,401.0		4%
Income from continuing operations before federal income tax expense		756.1			675.1		12%
Federal income tax expense		132.7			167.4		(21)%
Income from continuing operations		623.4			507.7		23%
Discontinued operations, net of taxes		(24.7	)		(2.3	)	NM
Cumulative effect of adoption of accounting principle, net of taxes		—			(3.4	)	NM
Net income	$	598.7		$	502.0		19%

Excluding additional federal income tax benefits recorded during the third and fourth quarters of 2005 as discussed below and the impact of discontinued operations described previously, the increase in net income primarily was driven by higher interest spread income and other income; the recognition of net realized gains on investments, hedging instruments and hedged items in 2005 compared to net losses in 2004; and increased asset fees. Higher amortization of DAC, increased other benefits and claims and debt extinguishment costs partially offset the overall improvement.

The increase in interest spread income was driven by the Corporate and Other and Individual Investments segments. Within Corporate and Other, higher interest spread income was due to increased invested asset levels primarily as a result of higher excess capital and surplus retained in the Corporate and Other segment and improved earnings from common stock and real estate investments. The increase in interest spread income within the Individual Investments segment primarily resulted from a higher level of invested assets and lower crediting rates.

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The increase in other income primarily occurred in the Retirement Plans segment due to higher asset-based fees from improving equity markets; revenue earned by RIA, which was acquired during the first quarter of 2005; and growth in trust and administration-only products.

The Company recorded net realized gains on investments, hedging instruments and hedged items during 2005 compared to net realized losses in 2004 primarily due to a significant decline in impairment charges.

Asset fees rose primarily due to increases in both average separate account values and the average asset fee rate charged in the Individual Investments segment.

Higher amortization of DAC primarily occurred within the Individual Investments segment due to increased variable annuity revenues. Fixed annuity true-ups and unlocking also contributed to the increase.

The increase in other benefits and claims primarily was driven by an increase in immediate annuity business and growth in contracts containing guaranteed living benefits within the Individual Investments segment. Additionally, Individual Protection benefits and claims increased primarily as a result of increased insurance in force and a corresponding net amount at risk.

During the third quarter of 2005, the Company paid $206.2 million to redeem all of its outstanding 7.10% junior subordinated debentures due October 1, 2028, which in turn caused the redemption by Nationwide Financial Services Capital Trust II of its outstanding 7.10% Trust Preferred Securities and 7.10% Trust Common Securities. As a result of this transaction, the Company incurred debt extinguishment costs of $21.7 million for accelerated amortization of unamortized debt issuance costs, including a deferred loss on previous hedging transactions. These amounts otherwise would have been recognized through 2028.

Also during the third quarter of 2005, the Company refined its separate account DRD estimation process. As a result, the Company identified and recorded additional federal income tax benefits and recoverables in the amount of $42.6 million related to all tax years (2000 – 2005) that were open at that time. In addition, the Company recorded $5.6 million of net benefit adjustments primarily related to differences between the 2004 estimated tax liability and the amounts reported on the Company’s 2004 tax returns. During the fourth quarter of 2005, the Company revised the estimate for the separate account DRD and recorded an additional federal income tax benefit of $8.0 million based on additional information available at year end. Therefore, the full year 2005 effective tax rate of 17.5% was lower than the 2004 rate of 24.8% primarily due to the additional DRD recorded in 2005 compared to 2004.

Sales

The Company regularly monitors and reports a production volume metric titled “sales.” Sales or similar measures are commonly used in the insurance industry as a measure of the volume of new and renewal business generated in a period.

Sales are not derived from any specific GAAP income statement accounts or line items and should not be viewed as a substitute for any financial measure determined in accordance with GAAP, including sales as it relates to non-insurance companies. Additionally, the Company’s definition of sales may differ from that used by other companies. As used in the insurance industry, sales, or similarly titled measures, generate customer funds managed and administered, which ultimately drive revenues.

As calculated and analyzed by management, statutory premiums and deposits on individual and group annuities and life insurance products calculated in accordance with accounting practices prescribed or permitted by regulatory authorities and deposits on administration-only group retirement plans and the advisory services program are adjusted as described below to arrive at sales.

Life insurance premiums determined on a GAAP basis are significantly different than statutory premiums and deposits. Life insurance premiums determined on a GAAP basis are recognized as revenue when due, as

36

calculated on an accrual basis in proportion to the service provided and performance rendered under the contract. In addition, many life insurance and annuity products involve an initial deposit or a series of deposits from customers. These deposits are accounted for as such on a GAAP basis and therefore are not reflected in the GAAP income statement. On a statutory basis, life insurance premiums collected (cash basis) and deposits received (cash basis) are aggregated and reported as statutory premiums and annuity consideration revenues.

Sales, as reported by the Company, are stated net of internal replacements, which management believes provides a more meaningful disclosure of production in a given period. In addition, the Company’s definition of sales excludes funding agreements issued under the Company’s MTN program; asset transfers associated with large case BOLI and large case retirement plan acquisitions; and deposits into Nationwide employee and agent benefit plans. Although these products contribute to asset and earnings growth, their production flows potentially can mask trends in the underlying business and thus do not provide meaningful comparisons and analyses.

Management believes that the presentation of sales as measured for management purposes enhances the understanding of the Company’s business and helps depict longer-term trends that may not be apparent in the results of operations due to differences between the timing of sales and revenue recognition.

The Company’s flagship products are marketed under The BEST of AMERICA brand and include individual variable and group annuities, group private sector retirement plans sold through NTC, and variable life insurance. The BEST of AMERICA products allow customers to choose from investment options managed by premier mutual fund managers. The Company has also developed private label variable and fixed annuity products in conjunction with other financial services providers that allow those providers to sell products to their own customer bases under their own brand names.

The Company also markets group deferred compensation retirement plans to employees of state and local governments for use under IRC Section 457. The Company utilizes its endorsement by NACo, USCM and IAFF when marketing IRC Section 457 products.

See Part I, Item 1—Business—Overview for a description of the Company’s sales distribution network.

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2006 Compared to 2005

The following table summarizes sales by product and segment for the years ended December 31:

(dollars in millions)	2006		2005		Change
Individual Investments
Individual variable annuities:
The BEST of AMERICA products	$	4,390.9	$	3,135.5	40%
Private label annuities		356.6		346.6	3%
NFN and other		3.6		4.7	(23)%
Total individual variable annuities		4,751.1		3,486.8	36%
Individual fixed annuities		186.5		194.4	(4)%
Income products		230.7		196.7	17%
Advisory services program		222.8		231.3	(4)%
Total Individual Investments		5,391.1		4,109.2	31%
Retirement Plans
Private sector:
The BEST of AMERICA annuity products		1,230.2		1,371.1	(10)%
The BEST of AMERICA trust products		4,504.0		3,974.9	13%
The 401(k) Company		1,722.7		1,342.3	28%
NFN products		188.2		205.9	(9)%
Other		69.4		75.8	(8)%
Total private sector		7,714.5		6,970.0	11%
Public sector:
IRC Section 457 annuities		1,533.3		1,544.8	(1)%
Administration-only agreements		2,484.9		2,336.9	6%
Total public sector		4,018.2		3,881.7	4%
Total Retirement Plans		11,732.7		10,851.7	8%
Individual Protection
Corporate-owned life insurance		805.9		657.5	23%
Traditional/universal life insurance		517.1		512.7	1%
The BEST of AMERICA variable life series		437.3		426.0	3%
NFN variable life products		201.7		229.0	(12)%
Total Individual Protection		1,962.0		1,825.2	7%
Total sales	$	19,085.8	$	16,786.1	14%

See Part II, Item 7—MD&A—Business Segments for an analysis of sales by product and segment.

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The following table summarizes sales by distribution channel for the years ended December 31:

(dollars in millions)	2006		2005		Change
Non-affiliated:
Independent broker/dealers	$	5,758.2	$	5,266.0	9%
Financial institutions		2,295.1		1,808.0	27%
Wirehouse and regional firms		2,433.6		1,912.5	27%
Pension plan administrators		532.8		469.0	14%
Life insurance specialists		580.6		382.4	52%
Total non-affiliated sales		11,600.3		9,837.9	18%
Affiliated:
NRS		4,050.2		3,914.7	3%
The 401(k) Company		1,722.7		1,342.3	28%
Nationwide agents		787.8		757.8	4%
NFN producers		698.7		658.0	6%
Mullin TBG		226.1		275.4	(18)%
Total affiliated sales		7,485.5		6,948.2	8%
Total sales	$	19,085.8	$	16,786.1	14%

The increase in total sales primarily was driven by higher variable annuity sales in the Individual Investments segment as a result of the strong performance of the recently introduced L.INC and CPPLI product riders. Also contributing to the overall increase were improved private sector sales in the Retirement Plans segment, led by trust products and The 401(k) Company, and higher COLI sales in the Individual Protection segment from the addition of a large case during 2006.

Higher sales in the independent broker/dealers, financial institutions, and wirehouse and regional firms channels primarily were due to increased variable annuity sales, specifically products offering the L.INC and CPPLI riders as mentioned above.

Sales generated by The 401(k) Company continued to grow as a result of larger annual employer discretionary contributions compared to the prior year and the addition of several large plans during 2006.

Sales increased through the life insurance specialists channel due to the addition of a large case in 2006.

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2005 Compared to 2004

The following table summarizes sales by product and segment for the years ended December 31:

(dollars in millions)	2005		2004		Change
Individual Investments
Individual variable annuities:
The BEST of AMERICA products	$	3,135.5	$	3,674.3	(15)%
Private label annuities		346.6		449.0	(23)%
NFN and other		4.7		7.0	(33)%
Total individual variable annuities		3,486.8		4,130.3	(16)%
Individual fixed annuities		194.4		858.8	(77)%
Income products		196.7		168.4	17%
Advisory services program		231.3		181.0	28%
Total Individual Investments		4,109.2		5,338.5	(23)%
Retirement Plans
Private sector:
The BEST of AMERICA annuity products		1,371.1		1,679.7	(18)%
The BEST of AMERICA trust products		3,974.9		3,232.0	23%
The 401(k) Company		1,342.3		893.1	50%
NFN products		205.9		335.8	(39)%
Other		75.8		28.1	170%
Total private sector		6,970.0		6,168.7	13%
Public sector:
IRC Section 457 annuities		1,544.8		1,514.2	2%
Administration-only agreements		2,336.9		2,122.9	10%
Total public sector		3,881.7		3,637.1	7%
Total Retirement Plans		10,851.7		9,805.8	11%
Individual Protection
Corporate-owned life insurance		657.5		564.5	16%
Traditional/universal life insurance		512.7		506.9	1%
The BEST of AMERICA variable life series		426.0		439.6	(3)%
NFN variable life products		229.0		255.8	(10)%
Total Individual Protection		1,825.2		1,766.8	3%
Total sales	$	16,786.1	$	16,911.1	(1)%

See Part II, Item 7—MD&A—Business Segments for an analysis of sales by product and segment.

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The following table summarizes sales by distribution channel for the years ended December 31:

(dollars in millions)	2005		2004		Change
Non-affiliated:
Independent broker/dealers	$	5,266.0	$	5,223.2	1%
Financial institutions		1,808.0		2,618.5	(31)%
Wirehouse and regional firms		1,912.5		1,992.1	(4)%
Pension plan administrators		469.0		476.1	(1)%
Life insurance specialists		382.4		382.8	—
Total non-affiliated sales		9,837.9		10,692.7	(8)%
Affiliated:
NRS		3,914.7		3,665.9	7%
The 401(k) Company		1,342.3		893.1	50%
Nationwide agents		757.8		714.3	6%
NFN producers		658.0		760.9	(14)%
Mullin TBG		275.4		184.2	50%
Total affiliated sales		6,948.2		6,218.4	12%
Total sales	$	16,786.1	$	16,911.1	(1)%

The slight decrease in total sales in 2005 primarily was driven by continued challenges within the Individual Investments segment, which was negatively impacted by the Company’s announced exit from the offshore fixed annuity business in the second quarter of 2005 due to a challenging rate environment that depressed margins on this business. In addition, the variable annuity line experienced lower sales of The BEST of AMERICA products, especially the MarketFLEX product. The overall decline in sales partially was offset by strong sales in the Retirement Plans segment, led by small 401(k) plan sales.

Sales generated by financial institutions declined primarily due to intense competition in fixed annuity sales and the impact of the exit from the offshore fixed annuity market mentioned above. The overall decline was partially offset by increases in sales in both the Individual Protection and Retirement Plans segments.

The 401(k) Company sales continued to grow primarily due to recurring flows from the addition of four large plans during the fourth quarter of 2004.

NRS sales growth continued primarily due to recurring deposits from the State of New York, the State of California and the City of Phoenix cases and higher than anticipated rates of plan transfers.

41

Business Segments

Individual Investments

2006 Compared to 2005

The following table summarizes selected financial data for the Company’s Individual Investments segment for the years ended December 31:

(dollars in millions)	2006			2005			Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	511.4		$	461.9		11%
Administrative fees		20.4			16.2		26%
Surrender fees		56.6			62.1		(9)%
Total policy charges		588.4			540.2		9%
Premiums on income products		142.5			102.9		38%
Net investment income		781.1			869.9		(10)%
Other income		2.3			1.5		53%
Total revenues		1,514.3			1,514.5		—
Benefits and expenses:
Interest credited to policyholder account values		528.3			589.1		(10)%
Annuity benefits and claims		202.4			155.4		30%
Amortization of DAC		352.7			329.3		7%
Amortization of VOBA		6.5			7.2		(10)%
Other operating expenses		213.6			196.5		9%
Total benefits and expenses		1,303.5			1,277.5		2%
Pre-tax operating earnings	$	210.8		$	237.0		(11)%
Other Data
Sales:
Individual variable annuities	$	4,751.1		$	3,486.8		36%
Individual fixed annuities		186.5			194.4		(4)%
Income products		230.7			196.7		17%
Advisory services program		222.8			231.3		(4)%
Total sales	$	5,391.1		$	4,109.2		31%
Average account values:
General account	$	14,041.3		$	15,966.7		(12)%
Separate account		37,223.3			35,600.5		5%
Advisory services program		508.1			309.3		64%
Total average account values	$	51,772.7		$	51,876.5		—
Account values as of period end:
Individual variable annuities	$	43,804.8		$	40,796.0		7%
Individual fixed annuities		6,536.1			8,041.8		(19)%
Income products		2,025.6			1,978.3		2%
Advisory services program		597.1			411.5		45%
Total account values	$	52,963.6		$	51,227.6		3%
GMDB—Net amount at risk, net of reinsurance	$	122.2		$	184.3		(34)%
GMDB—Reserves, net of reinsurance	$	29.6		$	27.2		9%
Pre-tax operating earnings to average account values		0.41	%		0.46	%

42

The decrease in pre-tax operating earnings was driven by higher annuity benefits and claims, lower interest spread income, increased amortization of DAC and higher other operating expenses. Increased asset fees and premiums on income products partially offset the overall decrease.

The increase in annuity benefits and claims was driven by increased immediate annuity reserves due to growth in sales relative to a year ago and an increasing proportion of business with living benefit features. This increase is consistent with the increase in premiums on income products noted below.

The following table summarizes the interest spread on Individual Investments segment average general account values for the years ended December 31:

	2006	2005
Net investment income	5.74%	5.61%
Interest credited	3.76%	3.69%
Interest spread on average general account values	1.98%	1.92%

Interest spread income declined even though interest spread margins widened during 2006 to 198 basis points compared to 192 basis points in 2005. Lower general account assets caused by fixed annuity net outflows drove a $16.0 million of the total reduction in interest spread income. In addition, 2006 included only 15 basis points, or $21.0 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 20 basis points, or $33.0 million, in 2005. For 2007, the Company expects interest spread margins to tighten in this segment and projects full year spreads of 185 to 190 basis points, including a nominal level of prepayment activity.

Amortization of DAC increased primarily due to higher variable annuity gross profits driven by higher asset levels. Higher gross profits accounted for $20.8 million of the increase compared to 2005.

Other operating expenses increased primarily due to higher sales incentives and employee compensation and benefits. In addition, in 2006 the Company began expensing at fair value the costs resulting from share-based payment transactions in accordance with SFAS 123R, resulting in $3.7 million in expense for this segment.

Asset fees rose due to both a higher average asset fee rate charged and higher average separate account values, representing approximately $28 million and $22 million, respectively, of the overall increase. The average variable asset fee rate increased to 1.37% from 1.30% in the prior year as new business sold with living benefit riders and corresponding higher fee rates influenced the overall average rate.

The increase in premiums on income products was due to higher interest rates relative to a year ago, which created a favorable environment for immediate annuity product sales. The Federal Funds rate was 5.25% at December 31, 2006 compared to 4.25% at December 31, 2005.

Higher sales occurred in the variable annuity business driven by the recently introduced L.INC and CPPLI product riders and a more targeted sales process. Sales of products with the L.INC and CPPLI riders accounted for $886.3 million and $451.9 million, respectively, of the increase in sales compared to 2005.

43

The following table summarizes selected information about the Company’s deferred individual fixed annuities, including the fixed option of variable annuities, as of December 31, 2006:

	Ratchet				Reset				Market value adjustment (MVA) and other				Total
(dollars in millions)	Account value		Weighted average crediting rate		Account value		Weighted average crediting rate		Account value		Weighted average crediting rate		Account value		Weighted average crediting rate
Minimum interest rate of 3.50% or greater	$	—	N/A		$	1,027.5	4.28	%	$	—	N/A		$	1,027.5	4.28	%
Minimum interest rate of 3.00% to 3.49%		2,130.2	4.59	%		4,720.4	3.13	%		—	N/A			6,850.6	3.58	%
Minimum interest rate lower than 3.00%		848.3	3.32	%		615.2	3.59	%		38.3	3.91	%		1,501.8	3.45	%
MVA with no minimum interest rate guarantee		—	N/A			—	N/A			1,586.9	2.88	%		1,586.9	2.88	%
Total deferred individual fixed annuities	$	2,978.5	4.23	%	$	6,363.1	3.36	%	$	1,625.2	2.91	%	$	10,966.8	3.53	%

44

2005 Compared to 2004

The following table summarizes selected financial data for the Company’s Individual Investments segment for the years ended December 31:

(dollars in millions)	2005			2004			Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	461.9		$	435.5		6%
Administrative fees		16.2			15.7		3%
Surrender fees		62.1			62.2		—
Total policy charges		540.2			513.4		5%
Premiums on income products		102.9			90.8		13%
Net investment income		869.9			872.8		—
Other income		1.5			0.4		NM
Total revenues		1,514.5			1,477.4		3%
Benefits and expenses:
Interest credited to policyholder account values		589.1			606.1		(3)%
Annuity benefits and claims		155.4			139.2		12%
Amortization of DAC		329.3			276.1		19%
Amortization of VOBA		7.2			7.5		(4)%
Other operating expenses		196.5			214.1		(8)%
Total benefits and expenses		1,277.5			1,243.0		3%
Pre-tax operating earnings	$	237.0		$	234.4		1%
Other Data
Sales:
Individual variable annuities	$	3,486.8		$	4,130.3		(16)%
Individual fixed annuities		194.4			858.8		(77)%
Income products		196.7			168.4		17%
Advisory services program		231.3			181.0		28%
Total sales	$	4,109.2		$	5,338.5		(23)%
Average account values:
General account	$	15,966.7		$	16,211.1		(2)%
Separate account		35,600.5			34,198.8		4%
Advisory services program		309.3			99.1		NM
Total average account values	$	51,876.5		$	50,509.0		3%
Account values as of period end:
Individual variable annuities	$	40,796.0		$	41,481.9		(2)%
Individual fixed annuities		8,041.8			8,902.5		(10)%
Income products		1,978.3			1,901.6		4%
Advisory services program		411.5			195.9		110%
Total account values	$	51,227.6		$	52,481.9		(2)%
GMDB—Net amount at risk, net of reinsurance	$	184.3		$	305.4		(40)%
GMDB—Reserves, net of reinsurance	$	27.2		$	23.7		15%
Pre-tax operating earnings to average account values		0.46	%		0.46	%

45

The slight increase in pre-tax operating earnings primarily was driven by higher asset fees, lower other operating expenses, additional interest spread income and increased premiums on income products, offset by increases in amortization of DAC and annuity benefits and claims.

Asset fees rose due to both higher average separate account values and a higher average asset fee rate charged, representing approximately $18 million and $8 million, respectively, of the overall increase. The increase in average separate account values primarily was due to the general upward trend in the equity and fixed income markets offset in part by withdrawals that exceeded new deposits. The average variable asset fee rate increased from 1.27% to 1.30% as new business sold with living benefit riders influenced the overall average rate.

Other operating expenses improved primarily due to lower sales incentives and reduced technology expenses.

The following table summarizes the interest spread on Individual Investments segment average general account values for the years ended December 31:

	2005		2004
Net investment income	5.61	%	5.52	%
Interest credited	3.69	%	3.74	%
Interest spread on average general account values	1.92	%	1.78	%

Interest spread margins widened during 2005 to 192 basis points compared to 178 basis points in 2004. Included in 2005 were 20 basis points, or $33.0 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 12 basis points, or $19.5 million, in 2004. The higher interest rate environment in 2005 relative to 2004 eased the pressure on margins due to the interest rate floors contained in certain annuity contracts and contributed to increased margins.

The increase in premiums on income products was driven by improving the competitiveness of the Company’s immediate annuity products by increasing the fixed purchase rate offered.

Higher amortization of DAC in 2005 compared to 2004 primarily was due to increased variable annuity gross profits driven by favorable market experience and business growth, which resulted in a $34.9 million true-up of amortization. In addition, increased fixed annuity gross profits, which were driven by higher income from mortgage loan prepayments and bond call premiums as well as increased surrender fees, resulted in a $5.0 million true-up of amortization. Unlocking within fixed annuities resulted in an additional $13.3 million of increased amortization in 2005 compared to 2004.

The increase in benefits and claims primarily was driven by increased premiums from immediate annuity products and growth in contracts containing guaranteed living benefits.

The decrease in fixed annuity sales was due to the competitive interest rate environment and the Company’s exit from the offshore fixed annuity business in the second quarter of 2005 as discussed earlier. In addition, the variable annuity line experienced lower sales of The BEST of AMERICA products, especially the MarketFLEX product, consistent with industry-wide declines.

46

The following table summarizes selected information about the Company’s deferred individual fixed annuities, including the fixed option of variable annuities, as of December 31, 2005:

	Ratchet			Reset			Market value adjustment (MVA) and other			Total
(dollars in millions)	Account value		Weighted average crediting rate	Account value		Weighted average crediting rate	Account value		Weighted average crediting rate	Account value		Weighted average crediting rate
Minimum interest rate of 3.50% or greater	$	—	N/A	$	1,388.5	4.13%	$	—	N/A	$	1,388.5	4.13%
Minimum interest rate of 3.00% to 3.49%		2,976.0	4.94%		5,856.6	3.09%		—	N/A		8,832.6	3.71%
Minimum interest rate lower than 3.00%		886.4	3.26%		353.5	3.10%		7.9	3.41%		1,247.8	3.22%
MVA with no minimum interest rate guarantee		—	N/A		—	N/A		1,543.8	3.01%		1,543.8	3.01%
Total deferred individual fixed annuities	$	3,862.4	4.55%	$	7,598.6	3.28%	$	1,551.7	3.01%	$	13,012.7	3.63%

47

Retirement Plans

2006 Compared to 2005

The following table summarizes selected financial data for the Company’s Retirement Plans segment for the years ended December 31:

(dollars in millions)	2006			2005			Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	134.0		$	137.8		(3)%
Administrative fees		36.0			8.7		NM
Surrender fees		4.5			8.2		(45)%
Total policy charges		174.5			154.7		13%
Net investment income		652.2			661.4		(1)%
Other income		284.2			225.6		26%
Total revenues		1,110.9			1,041.7		7%
Benefits and expenses:
Interest credited to policyholder account values		451.6			455.0		(1)%
Amortization of DAC		38.3			47.4		(19)%
Amortization of VOBA		6.9			3.5		97%
Other operating expenses		397.6			348.0		14%
Total benefits and expenses		894.4			853.9		5%
Pre-tax operating earnings	$	216.5		$	187.8		15%
Other Data
Sales:
Private sector	$	7,714.5		$	6,970.0		11%
Public sector		4,018.2			3,881.7		4%
Total sales	$	11,732.7		$	10,851.7		8%
Average account values:
General account	$	11,093.0		$	10,881.2		2%
Separate account		18,512.4			19,792.0		(6)%
Non-insurance assets		16,515.0			12,500.3		32%
Administration-only		42,854.4			36,217.3		18%
Total average account values	$	88,974.8		$	79,390.8		12%
Account values as of period end:
Private sector	$	53,467.1		$	42,906.5		25%
Public sector		43,951.8			40,092.0		10%
Total account values	$	97,418.9		$	82,998.5		17%
Pre-tax operating earnings to average account values		0.24	%		0.24	%

The increase in pre-tax operating earnings primarily was driven by higher other income and administrative fees and lower amortization of DAC, partially offset by higher other operating expenses.

The increase in other income, which includes administrative fees from non-insurance retirement and deferred compensation plans and asset-based fees from the NTC small-plan 401(k) platform, primarily was driven by higher other asset fees and mutual fund revenue of $34.3 million and $19.8 million, respectively, resulting from higher average variable assets.

48

The increase in administrative fees primarily was due to the surrender of a group fixed annuity contract, which resulted in an $18.6 million policy adjustment in the second quarter of 2006. In addition, the surrender of a group retirement plan in the third quarter of 2006 resulted in the recognition of $5.1 million of previously deferred revenue and $3.5 million of related VOBA amortization.

Amortization of DAC was lower in 2006 primarily due to unlocking in 2005 related to mutual fund revenue assumptions that resulted in higher amortization expense in 2005 compared to favorable true-ups in 2006.

The increase in other operating expenses reflects higher trail commissions of $18.6 million from increased average variable assets and higher asset-based variable expenses. Trail commissions represent compensation paid to the Company’s producing firms that is based on the level of assets under management rather than new deposits made in a given time period. Instead of paying a one-time amount at the point of sale, a smaller payment is made each period that the business remains in force. In some cases, a combination of both types of compensation is paid. In addition, the current year included $7.1 million of amortization related to an internally developed software application that did not exist in the same period a year ago.

The following table summarizes the interest spread on Retirement Plans segment average general account values for the years ended December 31:

	2006		2005
Net investment income	5.88	%	6.08	%
Interest credited	4.07	%	4.18	%
Interest spread on average general account values	1.81	%	1.90	%

Interest spread margins declined to 181 basis points in 2006 compared to 190 basis points for 2005. Included in 2006 were 9 basis points, or $9.9 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 20 basis points, or $22.1 million, in 2005. For 2007, the Company expects interest spread margins to continue to remain relatively stable in this segment and projects full year spreads of 180 to 185 basis points, including a nominal level of prepayment activity.

Private sector sales rose due to sales generated by The 401(k) Company as a result of larger annual employer discretionary contributions compared to the prior year and the addition of several large plans during 2006.

Public sector sales increased due to increased flows from existing cases and higher rates of plan transfers, especially IAFF cases. These increases were partially offset by the fixed annuity contract withdrawal mentioned previously.

49

2005 Compared to 2004

The following table summarizes selected financial data for the Company’s Retirement Plans segment for the years ended December 31:

(dollars in millions)	2005			2004			Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	137.8		$	150.8		(9)%
Administrative fees		8.7			8.9		(2)%
Surrender fees		8.2			12.1		(32)%
Total policy charges		154.7			171.8		(10)%
Net investment income		661.4			647.6		2%
Other income		225.6			160.1		41%
Total revenues		1,041.7			979.5		6%
Benefits and expenses:
Interest credited to policyholder account values		455.0			446.1		2%
Amortization of DAC		47.4			39.9		19%
Amortization of VOBA		3.5			4.7		(26)%
Other operating expenses		348.0			308.5		13%
Total benefits and expenses		853.9			799.2		7%
Pre-tax operating earnings	$	187.8		$	180.3		4%
Other Data
Sales:
Private sector	$	6,970.0		$	6,168.7		13%
Public sector		3,881.7			3,637.1		7%
Total sales	$	10,851.7		$	9,805.8		11%
Average account values:
General account	$	10,881.2		$	10,175.6		7%
Separate account		19,792.0			20,287.9		(2)%
Non-insurance assets		12,500.3			8,315.6		50%
Administration-only		36,217.3			30,078.1		20%
Total average account values	$	79,390.8		$	68,857.2		15%
Account values as of period end:
Private sector	$	42,906.5		$	37,736.0		14%
Public sector		40,092.0			38,925.2		3%
Total account values	$	82,998.5		$	76,661.2		8%
Pre-tax operating earnings to average account values		0.24	%		0.26	%

The increase in pre-tax operating earnings was driven by higher other income, partially offset by higher other operating expenses, lower policy charges and higher amortization of DAC.

The increase in other income was due to higher average variable assets, increased equity returns, NTC business growth, small case 401(k) asset growth and RIA revenue. These factors drove higher other asset fees and mutual fund revenue of $38.5 million and $19.6 million, respectively

Higher other operating expenses reflects a $17.1 million increase in trail commissions from increased average variable assets, $4.8 million higher deposit commissions associated with business growth and inclusion of $4.2 million of expenses related to the newly acquired RIA business early in 2005.

50

The decline in policy charges was driven by nearly all new contract sales coming from NTC non-annuity contracts, whose fees are recorded as other income versus policy charges, and continued surrenders of group annuity contracts.

The increase in amortization of DAC was related to changes in private sector amortization assumptions driven by actual experience for the declining block of group annuity business.

The following table summarizes the interest spread on Retirement Plans segment average general account values for the years ended December 31:

	2005		2004
Net investment income	6.08	%	6.36	%
Interest credited	4.18	%	4.38	%
Interest spread on average general account values	1.90	%	1.98	%

Interest spread margins declined to 190 basis points in 2005 compared to 198 basis points for 2004. Included in 2005 were 20 basis points, or $22.1 million, of income from mortgage loan prepayment penalties and bond call premiums compared to 18 basis points, or $17.9 million, in 2004. Excluding the impact from prepayment activity, the decrease in margins was driven by the combination of long-duration higher yielding assets rolling over into lower yielding assets as yields on new cash flows were below the portfolio rate.

Private sector sales increases were driven by additional production through the independent broker/dealers and financial institutions channels and growth at The 401(k) Company primarily due to flows associated with the addition of four large plans during the fourth quarter of 2004.

The increase in public sector sales was due to growth in large cases, including the State of New York, the State of California, the State of Maryland, the State of Florida and the City of Phoenix plans. Growth in the State of New York plan occurred due to increased participation at the state level, along with increased adoption of the state’s plan by smaller entities, which added large numbers of eligible participants. The increased sales in the State of California and the City of Phoenix plans primarily were due to higher plan transfers. The majority of the increases related to the State of Maryland and the State of Florida plans were associated with the re-introduction of the state-funded 401(a) plan.

51

Individual Protection

2006 Compared to 2005

The following table summarizes selected financial data for the Company’s Individual Protection segment for the years ended December 31:

(dollars in millions)	2006		2005		Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	45.8	$	40.2	14%
Cost of insurance charges		402.0		388.5	3%
Administrative fees		82.7		90.0	(8)%
Surrender fees		22.6		27.9	(19)%
Total policy charges		553.1		546.6	1%
Traditional life insurance premiums		299.0		297.0	1%
Net investment income		468.1		475.1	(1)%
Other income		25.3		29.8	(15)%
Total revenues		1,345.5		1,348.5	—
Benefits and expenses:
Interest credited to policyholder account values		191.7		190.7	1%
Life insurance benefits		444.4		419.5	6%
Policyholder dividends on participating policies		90.7		107.3	(15)%
Amortization of DAC		81.6		102.7	(21)%
Amortization of VOBA		32.6		34.3	(5)%
Other operating expenses		229.7		235.8	(3)%
Total benefits and expenses		1,070.7		1,090.3	(2)%
Pre-tax operating earnings	$	274.8	$	258.2	6%
Other Data
Sales:
Corporate-owned life insurance	$	805.9	$	657.5	23%
Traditional/universal life insurance		517.1		512.7	1%
The BEST of AMERICA variable life series		437.3		426.0	3%
NFN variable life products		201.7		229.0	(12)%
Total sales	$	1,962.0	$	1,825.2	7%
Policy reserves as of period end:
Individual investment life insurance	$	5,842.5	$	5,329.5	10%
Corporate investment life insurance		8,514.4		6,744.6	26%
Traditional life insurance		4,170.9		4,225.2	(1)%
Universal life insurance		1,159.0		1,089.3	6%
Total policy reserves	$	19,686.8	$	17,388.6	13%
Insurance in force as of period end:
Individual investment life insurance	$	57,536.7	$	57,021.7	1%
Corporate investment life insurance		24,764.4		23,635.5	5%
Traditional life insurance		41,061.3		36,589.3	12%
Universal life insurance		9,950.3		9,114.6	9%
Total insurance in force	$	133,312.7	$	126,361.1	6%

52

The increase in pre-tax operating earnings primarily was driven by decreased amortization of DAC, lower policyholder dividends on participating policies and increased cost of insurance charges. Higher life insurance benefits, lower net investment income and lower administrative fees partially offset the overall increase.

Amortization of DAC declined primarily due to unlocking related to mortality assumptions within the fixed life line of business resulting in $17.4 million of lower DAC amortization.

Higher cost of insurance charges were due to increased business in force combined with the aging of the individual life business block. The aging of a block generally increases cost of insurance charges.

Higher life insurance benefits were due to adverse mortality in both the fixed and investment life businesses, partially offset by a $3.3 million waiver of premium reserve release in fixed life during the first quarter of 2006. The overall increase in total policyholder benefits was partially offset by lower policyholder dividends on participating policies, primarily driven by a lower current dividend scale.

Despite the slight growth in fixed account assets, net investment income declined primarily due to a $7.0 million decrease in mortgage loan prepayment and bond call premium income compared to the prior year.

Administrative fees decreased primarily due to a change in business mix in the current year.

The increase in sales primarily was attributable to significant COLI production during 2006.

53

2005 Compared to 2004

The following table summarizes selected financial data for the Company’s Individual Protection segment for the years ended December 31:

(dollars in millions)	2005		2004		Change
Statements of Income Data
Revenues:
Policy charges:
Asset fees	$	40.2	$	34.4	17%
Cost of insurance charges		388.5		379.7	2%
Administrative fees		90.0		93.3	(4)%
Surrender fees		27.9		30.0	(7)%
Total policy charges		546.6		537.4	2%
Traditional life insurance premiums		297.0		311.9	(5)%
Net investment income		475.1		467.9	2%
Other income		29.8		32.9	(9)%
Total revenues		1,348.5		1,350.1	—
Benefits and expenses:
Interest credited to policyholder account values		190.7		189.4	1%
Life insurance benefits		419.5		409.4	2%
Policyholder dividends on participating policies		107.3		101.4	6%
Amortization of DAC		102.7		114.4	(10)%
Amortization of VOBA		34.3		40.1	(14)%
Other operating expenses		235.8		252.7	(7)%
Total benefits and expenses		1,090.3		1,107.4	(2)%
Pre-tax operating earnings	$	258.2	$	242.7	6%
Other Data
Sales:
Corporate-owned life insurance	$	657.5	$	564.5	16%
Traditional/universal life insurance		512.7		506.9	1%
The BEST of AMERICA variable life series		426.0		439.6	(3)%
NFN variable life products		229.0		255.8	(10)%
Total sales	$	1,825.2	$	1,766.8	3%
Policy reserves as of period end:
Individual investment life insurance	$	5,329.5	$	4,962.1	7%
Corporate investment life insurance		6,744.6		5,444.1	24%
Traditional life insurance		4,225.2		4,278.9	(1)%
Universal life insurance		1,089.3		997.9	9%
Total policy reserves	$	17,388.6	$	15,683.0	11%
Insurance in force as of period end:
Individual investment life insurance	$	57,021.7	$	56,836.7	—
Corporate investment life insurance		23,635.5		10,904.1	117%
Traditional life insurance		36,589.3		32,979.4	11%
Universal life insurance		9,114.6		8,505.5	7%
Total insurance in force	$	126,361.1	$	109,225.7	16%

54

Higher pre-tax operating earnings were driven by lower other operating expenses and amortization of DAC and higher cost of insurance charges. A decline in life insurance premiums and increased life insurance benefits partially offset the overall increase.

Lower other operating expenses primarily resulted from a decline in certain uncapitalized commissions due to a shift in mix to products with lower commission rates. Also contributing to the decrease were higher capitalization of certain software charges related to a systems consolidation project with an increase in the amounts eligible to be capitalized and additional mutual fund expense reimbursements from increased separate account values.

The decrease in amortization of DAC resulted from lower amortization in the universal life business primarily related to mortality experience.

The increase in cost of insurance charges reflects a growing block of investment and universal life business with increased insurance in force. The aging of the block generally tends to increase the cost of insurance charged.

Life insurance premiums decreased due to the expected decline of the NFN closed block, lower fixed life sales and the impact of changes in reinsurance coverage from yearly renewable term to coinsurance in the traditional life portfolio.

The life insurance benefits increase was due to adverse overall mortality experience compared to 2004. In addition, benefit charges increased in the fixed and variable universal life and traditional life businesses due to increased insurance in force.

Higher sales were driven by improved COLI sales, partially offset by declines in variable life production. The increase in COLI sales was driven by several large cases that closed during 2005 and a more favorable legislative environment.

55

Corporate and Other

2006 Compared to 2005

The following table summarizes selected financial data for the Company’s Corporate and Other segment for the years ended December 31:

(dollars in millions)	2006			2005			Change
Statements of Income Data
Operating revenues:
Net investment income	$	397.1		$	337.5		18%
Other income		48.3			47.5		2%
Total operating revenues		445.4			385.0		16%
Benefits and operating expenses:
Interest credited to policyholder account values		208.7			146.1		43%
Interest expense on debt		103.1			107.7		(4)%
Debt extinguishment costs		—			21.7		NM
Other operating expenses		65.9			53.8		22%
Total benefits and operating expenses		377.7			329.3		15%
Pre-tax operating earnings		67.7			55.7		22%
Net realized (losses) gains on investments, hedging instruments and hedged items1		(0.6	)		18.2		NM
Adjustment to amortization related to net realized gains and losses		9.7			(0.8	)	NM
Income from continuing operations before federal income taxes	$	76.8		$	73.1		5%
Other Data
Account values as of period end—
Funding agreements backing medium-term notes	$	4,599.5		$	3,998.2		15%
Nationwide Bank		222.3			—		NM
Total account values	$	4,821.8		$	3,998.2		21%

¹ Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).

Pre-tax operating earnings increased primarily due to the aforementioned prior year debt extinguishment costs along with lower interest expense on debt, partially offset by higher other operating expenses.

During the third quarter of 2005, the Company paid $206.2 million to redeem all of its outstanding 7.10% junior subordinated debentures due October 1, 2028, which in turn caused the redemption by Nationwide Financial Services Capital Trust II of its outstanding 7.10% Trust Preferred Securities and 7.10% Trust Common Securities. As a result of this transaction, the Company incurred debt extinguishment costs of $21.7 million for accelerated amortization of unamortized debt issuance costs, including a deferred loss on previous hedging transactions. These amounts otherwise would have been recognized through 2028.

The decline in interest expense on debt was due to a $5.6 million decrease in short-term interest expense driven by lower average short-term debt balances in 2006 compared to the prior year.

Higher other operating expenses primarily were driven by Nationwide Bank start-up costs of $14.0 million and increased retail broker/dealer project costs, partially offset by lower legal expenses due to favorable developments on several cases in 2006.

56

The Company recorded net realized losses on investments, hedging instruments and hedged items during 2006 compared to net realized gains in the prior year primarily due to an increase in gross losses on sales of fixed maturity securities, partially offset by lower current year impairments as 2005 included significant losses on airline industry holdings.

The following table summarizes net realized gains on investments, hedging instruments and hedged items from continuing operations by source for the periods indicated:

(in millions)	2006			2005
Total realized gains on sales, net of hedging losses	$	98.7		$	98.5
Total realized losses on sales, net of hedging gains		(75.6	)		(28.7	)
Total other-than-temporary and other investment impairments		(16.8	)		(41.2	)
Credit default swaps		(1.1	)		(7.5	)
Periodic net coupon settlements on non-qualifying derivatives		1.9			1.0
Other derivatives		(0.6	)		1.2
Trading portfolio valuation gain		—			0.4
Total realized gains before adjustments		6.5			23.7
Amounts credited to policyholder dividend obligation		0.1			(5.2	)
Other		2.5			2.3
Net realized gains on investments, hedging instruments and hedged items	$	9.1		$	20.8

The Company has a comprehensive portfolio monitoring process for fixed maturity and equity securities to identify and evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. See Part II, Item 7—MD&A—Critical Accounting Policies and Recently Issued Accounting Standards—Impairment Losses on Investments for a complete discussion of this process.

57

2005 Compared to 2004

The following table summarizes selected financial data for the Company’s Corporate and Other segment for the years ended December 31:

(dollars in millions)	2005			2004			Change
Statements of Income Data
Operating revenues:
Net investment income	$	337.5		$	243.4		39%
Other income		47.5			66.6		(29)%
Total operating revenues		385.0			310.0		24%
Benefits and operating expenses:
Interest credited to policyholder account values		146.1			86.7		69%
Interest expense on debt		107.7			102.4		5%
Debt extinguishment costs		21.7			—		NM
Other operating expenses		53.8			62.3		(14)%
Total benefits and operating expenses		329.3			251.4		31%
Pre-tax operating earnings		55.7			58.6		(5)%
Net realized gains (losses) on investments, hedging instruments and hedged items1		18.2			(40.9	)	NM
Adjustment to amortization of DAC related to net realized gains and losses		(0.8	)		—		NM
Income from continuing operations before federal income taxes	$	73.1		$	17.7		NM
Other Data
Account values as of period end—Funding agreements backing medium-term notes	$	3,998.2		$	4,401.6		(9)%

¹ Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).

Pre-tax operating earnings declined slightly due to the aforementioned debt extinguishment costs and lower other income, partially offset by higher interest spread income.

Other income and other expenses declined due to a $7.3 million reclassification of activity related to variable interest entities (VIEs) between other expenses and other income. In addition, other income was impacted by a decrease in the number of structured products transactions as margins on these deals compressed.

Interest spread income rose due to increased invested asset levels as a result of higher excess capital and surplus retained in this segment and improved earnings from common stock and real estate investments. Lower margins on the MTN program offset some of these improvements.

The Company recorded net realized gains on investments, hedging instruments and hedged items during 2005 compared to net realized losses in 2004 primarily due to a significant decline in impairment charges driven by a generally improved credit environment.

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The following table summarizes net realized gains (losses) on investments, hedging instruments and hedged items from continuing operations by source for the years ended December 31:

(in millions)	2005			2004
Total realized gains on sales, net of hedging losses	$	98.5		$	100.9
Total realized losses on sales, net of hedging gains		(28.7	)		(29.9	)
Total other-than-temporary and other investment impairments		(41.2	)		(103.3	)
Credit default swaps		(7.5	)		0.3
Periodic net coupon settlements on non-qualifying derivatives		1.0			6.5
Other derivatives		1.2			(5.1	)
Trading portfolio valuation gain		0.4			0.8
Total realized gains (losses) before adjustments		23.7			(29.8	)
Amounts credited to policyholder dividend obligation		(5.2	)		(7.0	)
Other		2.3			4.6
Net realized gains (losses) on investments, hedging instruments and hedged items	$	20.8		$	(32.2	)

The following table summarizes for the year ended December 31, 2006 the Company’s largest aggregate losses on sales and write-downs by issuer, the related circumstances giving rise to the losses and the circumstances that may have affected other material investments held:

	Fair value at sale (proceeds)		YTD loss on sale			YTD write-downs			December 31, 2006
(in millions)									Holdings1		Net unrealized gain
A global service company that provides financial guarantee products and specialized financial services to public finance and structured finance clients.	$	20.3	$	(7.6	)	$	—		$	—	$	—
U.S. government agency securities that were sold at a loss in 2006. No impairment is necessary on the remaining holdings.		224.2		(4.9	)		—			564.5		43.9
U.S. government securities that were sold at a loss in 2006. No impairment is necessary on the remaining holdings.		202.9		(2.7	)		—			179.0		10.1
A global service company that provides electronic commerce and payment services for businesses and consumers. The securities were sold during 2006.		48.0		(2.3	)		—			—		—
A global service company that designs, manufactures and distributes permanent merchandising systems and point-of-purchase displays for leading consumer branded cosmetics companies and mass market retailers. No impairment is necessary on the remaining holdings.		1.0		—			(3.7	)		1.4		—
Total	$	496.4	$	(17.5	)	$	(3.7	)	$	744.9	$	54.0

¹ Holdings represent amortized cost of fixed maturity securities and cost of equity securities as of the date indicated.

No other issuer had aggregate losses on sales and write-downs greater than 2.0% of the Company’s total gross losses on sales and write-downs on fixed maturity and equity securities.

59

Liquidity and Capital Resources

Liquidity and capital resources demonstrate the overall financial strength of the Company and its ability to generate cash flows from its operations and borrow funds at competitive rates to meet operating and growth needs.

The Company’s capital structure consists of long-term debt and shareholders’ equity. The following table summarizes the Company’s capital structure as of December 31:

(in millions)	2006		2005		2004
Long-term debt	$	1,398.5	$	1,398.0	$	1,406.0
Shareholders’ equity, excluding accumulated other comprehensive income		5,506.4		5,249.7		4,782.9
Accumulated other comprehensive income		31.9		100.7		432.2
Total shareholders’ equity		5,538.3		5,350.4		5,215.1
Total capital	$	6,936.8	$	6,748.4	$	6,621.1

NFS is a holding company whose principal assets are the common stock of NLIC and NLICA. The principal sources of funds for NFS to pay interest, dividends and operating expenses are existing cash and investments and dividends from NLIC, NLICA and other subsidiaries. See Part I, Item 1—Business—Regulation—Regulation of Dividends and Other Payments from Insurance Companies for a description of NLIC and NLICA dividend limitations. NFS currently does not expect such regulatory requirements to impair the ability of its insurance subsidiaries to pay sufficient dividends in order for NFS to have the necessary funds available to meet its obligations.

A primary liquidity concern with respect to annuity and life insurance products is the risk of early policyholder withdrawal. The Company attempts to mitigate this risk by offering variable products where the investment risk is transferred to the policyholder, charging surrender fees at the time of withdrawal for certain products, applying a market value adjustment to withdrawals for certain products in the Company’s general account, and monitoring and matching anticipated cash inflows and outflows.

For individual annuity products ($50.34 billion and $48.84 billion of reserves as of December 31, 2006 and 2005, respectively), the surrender charge is generally calculated as a percentage of the deposits made and is assessed at declining rates during the first seven years after a deposit is made.

For group annuity products ($25.36 billion and $25.57 billion of reserves as of December 31, 2006 and 2005, respectively), the surrender charge amounts and periods can vary significantly, depending on the terms of each contract and the compensation structure for the producer. Generally, surrender charge percentages for group products are less than individual products because the Company incurs lower expenses at contract origination for group products. In addition, over ninety percent of the general account group annuity reserves are subject to a market value adjustment at withdrawal.

Life insurance policies are less susceptible to withdrawal than annuity products because policyholders generally must undergo a new underwriting process and may incur a surrender fee in order to obtain a new insurance policy.

The short-term and long-term liquidity requirements of the Company are monitored regularly to match cash inflows with cash requirements. The Company reviews its short-term and long-term projected sources and uses of funds and the asset/liability, investment and cash flow assumptions underlying these projections. The Company periodically makes adjustments to its investment policies to reflect changes in short-term and long-term cash needs and changing business and economic conditions.

Given the Company’s historical cash flow and current financial results, management of the Company believes that the cash flow from the operating activities of the Company over the next year will provide sufficient liquidity for the operations of the Company and will provide sufficient funds to enable the Company to make dividend and interest payments.

60

The Company has additional financing capacity under a shelf registration statement dated March 31, 2006. Under the shelf registration statement, NFS can offer various security instruments including, but not limited to, unsecured senior or subordinated debt securities, preferred stock, Class A common stock, warrants, stock purchase contracts or stock purchase units. In conjunction with owned trusts, capital securities guaranteed by NFS also may be issued.

See Part II, Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for a description of the Company’s stock repurchase program and its impact on liquidity.

Short-Term Debt

The Company has available as a source of funds a $1.00 billion revolving variable rate credit facility entered into by NFS, NLIC and NMIC with a group of national financial institutions. The facility provides for several and not joint liability with respect to any amount drawn by any party. The facility provides covenants, including, but not limited to, requirements that the Company maintain consolidated tangible net worth, as defined, in excess of $2.60 billion and that NLIC maintain statutory surplus, as defined, in excess of $1.67 billion. As of December 31, 2006, the Company and NLIC were in compliance with all covenants. The Company had no amounts outstanding under this agreement as of December 31, 2006 and 2005. NLIC also has an $800.0 million commercial paper program and is required to maintain an available credit facility equal to 50% of any amounts outstanding under the commercial paper program. Therefore, borrowing capacity under the aggregate $1.00 billion revolving credit facility is reduced by 50% of any amounts outstanding under the commercial paper program. NLIC had no commercial paper outstanding at December 31, 2006 and $134.7 million outstanding at December 31, 2005 at a weighted average effective interest rate of 4.22%.

In addition, the Company has a majority-owned subsidiary that has available an annually renewable, 364-day, $10.0 million variable rate line of credit agreement with a single financial institution. The line of credit is guaranteed by NFS and is included in the consolidated balance sheets. The majority-owned subsidiary had $10.0 million outstanding on that line of credit as of December 31, 2006 and 2005 at a weighted average effective interest rate of 5.29% in 2006 and 4.35% in 2005.

The Company also has a wholly-owned subsidiary with a five-year letter of credit issuance agreement with a single financial institution to provide up to $25.0 million in letters of credit. The agreement was effective September 30, 2006 and is guaranteed by NFS. The wholly-owned subsidiary had issued $24.7 million in letters of credit from this facility as of December 31, 2006.

NLIC has entered into an agreement with its custodial bank to borrow against the cash collateral that is posted in connection with its securities lending program. This is an uncommitted facility contingent on the liquidity of the securities lending program. The borrowing facility was established to fund commercial mortgage loans that were originated with the intent of sale through securitization. The maximum amount available under the agreement is $350.0 million. The borrowing rate on this program is equal to one-month U.S. London Interbank Offered Rate (LIBOR). NLIC had $75.2 million and $75.0 million outstanding under this agreement as of December 31, 2006 and 2005, respectively. As of December 31, 2006, the Company had not provided any guarantees on such borrowings, either directly or indirectly.

Long-Term Debt

Long-term debt primarily is comprised of (1) three separate issuances of $300.0 million in principal amount of senior notes and two separate issuances of $200.0 million in principal amount of senior notes, none of which is subject to any sinking fund payments, and (2) a single issuance of $100.0 million in principal amount of junior subordinated debentures that are due March 1, 2037 and pay a distribution rate of 7.899%, issued to an unconsolidated subsidiary trust.

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The $300.0 million principal of 8.00% senior notes due March 1, 2027 were issued in March 1997 and are redeemable, in whole or in part, at the option of NFS at any time on or after March 1, 2007 at scheduled redemption premiums through March 1, 2016, and, thereafter, at 100% of the principal amount thereof plus, in each case, accrued and unpaid interest. The $300.0 million principal of 6.25% senior notes due November 15, 2011 were issued in November 2001 and are not redeemable prior to their maturity date. The $300.0 million principal of 5.90% senior notes due July 1, 2012, issued in June 2002, and the $200.0 million principal of 5.625% senior notes due February 13, 2015, issued in February 2003, are redeemable, in whole or in part, at the option of NFS at any time or from time to time at a redemption price equal to the greater of (1) 100% of the aggregate principal amount of the notes to be redeemed or (2) the sum of the present value of the remaining scheduled payments of principal and interest on the notes, discounted to the redemption date on a semi-annual basis at a prevailing U.S. Treasury rate plus 20 basis points, together in each case with accrued interest payments to the redemption date. The $200.0 million principal of 5.10% senior notes due October 1, 2015 were issued in September 2005 and are redeemable, in whole or in part, at the option of NFS at any time or from time to time at a redemption price equal to the greater of (1) 100% of the aggregate principal amount of the notes to be redeemed or (2) the sum of the present value of the remaining scheduled payments of principal and interest on the notes, discounted to the redemption date on a semi-annual basis at a prevailing U.S. Treasury rate plus 15 basis points, together in each case with accrued interest payments to the redemption date.

The terms of each series of senior notes contain various restrictive business and financial covenants, including limitations on the disposition of subsidiaries. As of December 31, 2006, the Company was in compliance with all such covenants.

On March 11, 1997, Nationwide Financial Services Capital Trust I (Trust I) sold, in a public offering, $100.0 million principal of 7.899% capital securities, representing preferred undivided beneficial interests in the assets of Trust I. This sale generated net proceeds of $98.3 million. Concurrent with the sale of the capital securities, NFS sold to Trust I $103.1 million principal of its 7.899% junior subordinated debentures due March 1, 2037. The junior subordinated debentures are the sole assets of Trust I and are redeemable by NFS in whole at any time or in part from time to time at par plus an applicable make-whole premium. The related capital securities will mature or be called simultaneously with the junior subordinated debentures and have a liquidation value of $1,000 per capital security. The capital securities are fully and unconditionally guaranteed by NFS, and there are no related sinking fund requirements. Distributions on the capital securities are cumulative and payable semi-annually in arrears.

Guarantees

See Note 19 to the audited consolidated financial statements included in the F pages of this report for a description of the potential impact on liquidity of the Company’s guarantees.

62

Contractual Obligations and Commitments

The following table summarizes the Company’s contractual obligations and commitments as of December 31, 2006 expected to be paid in the periods presented. Payment amounts reflect the Company’s estimate of undiscounted cash flows related to these obligations and commitments. Balance sheet amounts were determined in accordance with GAAP and in many cases differ significantly from the summation of undiscounted cash flows. The most significant difference relates to future policy benefits related to life and health insurance, which include discounting.

	Payments due by period										Amount per balance sheet
(in millions)	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
Debt:
Short-term1	$	92.9	$	—	$	—	$	—		92.9	$	85.2
Long-term2:
Unrelated parties		81.9		163.8		179.4		1,769.6		2,194.7		1,295.4
Related parties		8.1		16.2		16.2		308.0		348.5		103.1
Subtotal		182.9		180.0		195.6		2,077.6		2,636.1		1,483.7
Lease and license obligations3:
Operating leases		22.4		39.9		26.1		47.1		135.5		—
Capital leases		0.2		—		—		—		0.2		—
License		10.3		23.8		17.1		0.7		51.9		—
Subtotal		32.9		63.7		43.2		47.8		187.6		—
Purchase and lending commitments:
Fixed maturity securities4		53.9		—		—		—		53.9		—
Commercial mortgage loans4		137.7		1.8		—		—		139.5		—
Limited partnerships5		188.7		—		—		—		188.7		—
Subtotal		380.3		1.8		—		—		382.1		—
Future policy benefits and claims6:
Fixed annuities and fixed option of variable annuities7		2,145.3		2,941.7		2,170.5		5,456.3		12,713.8		11,846.9
Life and health insurance7		727.3		1,696.0		1,231.2		12,492.7		16,147.2		8,148.8
Single premium immediate annuities8		249.5		463.6		398.1		1,883.4		2,994.6		1,906.5
Group pension deferred fixed annuities9		1,496.2		2,621.2		2,154.5		8,844.4		15,116.3		11,163.2
Funding agreements backing MTNs2, 10		2,167.0		1,987.8		915.4		297.9		5,368.1		5,032.4
Subtotal		6,785.3		9,710.3		6,869.7		28,974.7		52,340.0		38,097.8
Cash and securities collateral11:
Cash collateral on securities lending		886.7		—		—		—		886.7		886.7
Cash collateral on derivative transactions		171.0		—		—		—		171.0		171.0
Securities collateral on securities lending		859.9		—		—		—		859.9		859.9
Securities collateral on derivative transactions		12.8		—		—		—		12.8		12.8
Subtotal		1,930.4		—		—		—		1,930.4		1,930.4
Total	$	9,311.8	$	9,955.8	$	7,108.5	$	31,100.1	$	57,476.2	$	41,511.9

¹ No contractual provisions exist that could create, increase or accelerate those obligations presented. The amount presented includes contractual principal and interest based on rates in effect at December 31, 2006.

63

² Contractual provisions exist that could increase or accelerate those obligations presented. The amounts presented include contractual principal and interest based on stated rates in effect at December 31, 2006.

³ Contractual provisions exist that could increase or accelerate those lease obligations presented, including various leases with early buyouts and/or escalation clauses. However, the impact of any such transactions would not be material to the Company’s financial position or results of operations.

⁴ No contractual provisions exist that could create, accelerate or materially increase those obligations presented.

⁵ Primarily related to investments in low-income-housing tax credit partnerships. Call dates for the obligations presented are either date or event specific. The date specific requirement mandates the Company fund a specified amount on a stated date provided there are no defaults under the agreement. The event specific requirement is such that the Company is obligated to fund a specified amount of its capital commitment when all the properties in a fund become fully stabilized. The ultimate call date of these commitments may extend beyond one year but have been reflected in payments due in less than one year due to the call features. The Company’s capital typically is called within one to four years, depending on when the events contemplated in the documents transpire.

⁶ A significant portion of policy contract benefits and claims to be paid do not have stated contractual maturity dates and may not result in any ultimate payment obligation. Amounts reported herein represent estimated undiscounted cash flows out of the Company’s general account related to death, surrender, annuity and other benefit payments under policy contracts in force at December 31, 2006. Separate account payments are not reflected herein due to the matched nature of these obligations and because the contract owners maintain the investment risk of such deposits. Estimated payment amounts reported herein were developed based on review of historical results experienced by the Company and the related contractual provisions. Significant assumptions incorporated in the reported amounts include: future policy lapse rates (including the impact of customer decisions to make future premium payments to keep the related policies in force), coverage levels remaining unchanged from those provided under contracts in force at December 31, 2006, future interest crediting rates, and the estimated timing of payments. Actual amounts will vary, potentially by a significant amount, from the amounts indicated due to deviations between assumptions and actual results and the addition of new business in future periods.

⁷ Contractual provisions exist which could adjust the amount and/or timing of those obligations reported. Key assumptions related to payments due by period include customer lapse and withdrawal rates (including timing of death), exchanges to and from the fixed and separate accounts of the variable annuities, claims experience with respect to variable annuity guarantees, and future interest crediting level. Assumptions for future interest crediting levels have been made based on processes consistent with the Company’s past practices, which is at the discretion of the Company, subject to guaranteed minimum crediting rates in many cases and/or subject to contractually obligated increases for specified periods of time. Many of the contracts with potentially accelerated timing of payments are subject to surrender charges which are generally calculated as a percentage of deposits made and are assessed at declining rates during the first seven years after a deposit is made. Amounts disclosed herein include an estimate of those accelerated payments, net of applicable surrender charges. See Note 2(j) to the audited consolidated financial statements included in the F pages of this report for a description of the Company’s method for establishing life and annuity reserves in accordance with GAAP. Health reserves are immaterial and are reflected in the less than one-year column.

⁸ Certain assumptions have been made about mortality experience and retirement patterns in the amounts reported. Actual deaths and retirements may differ significantly from those projected, which could cause the timing of the obligations reported to vary significantly. In addition, contractual surrender provisions exist on an immaterial portion of these contracts that could accelerate those obligations presented. The amounts disclosed herein do not include an estimate of those accelerated payments. Most of the contracts with potentially accelerated timing of payments are subject to surrender charges which are generally calculated as a percentage of the commuted value of the remaining term certain benefit payments and are assessed at declining rates during the first seven policy years.

⁹ Contractual provisions exist that could increase those obligations presented. In developing the estimates of payments due by period, the process for determining future interest crediting rates as described in note 7 above was followed.

64

¹⁰ See Part II, Item 7—MD&A—Off-Balance Sheet Transactions for a detailed discussion of the Company’s MTN program. The amounts presented include contractual principal and interest based on rates in effect at December 31, 2006.

¹¹ Since the timing of the return of collateral is uncertain, these obligations have been reflected in payments due in less than one year. See Part II, Item 7—MD&A—Investments—General for a detailed discussion of the impact of collateral on the Company’s consolidated balance sheets.

Off-Balance Sheet Transactions

Under the MTN program, NLIC issues funding agreements to an unconsolidated third party trust to secure notes issued to investors by the trust. The funding agreements rank pari passu with all other insurance claims of the issuing company in the event of liquidation and should be treated as “annuities” under applicable Ohio insurance law. Therefore, the funding agreement obligations are classified as a component of future policy benefits and claims on the consolidated balance sheets. Because the Company is not the primary beneficiary of, and has no ownership interest in, or control over, the third party trust that issues the MTNs, the Company does not include the trust in its consolidated financial statements. Since the notes issued by the trust have a secured interest in the funding agreements issued by the Company, Moody’s and S&P assign the same ratings to the notes and the insurance financial strength of NLIC.

Investments

General

The Company’s assets are divided between separate account and general account assets. As of December 31, 2006, $70.69 billion (59%) of the Company’s total assets were held in separate accounts ($65.96 billion, or 57%, as of December 31, 2005) and $48.72 billion (41%) were held in the Company’s general account ($50.20 billion, or 43%, as of December 31, 2005), including $41.20 billion of general account investments ($43.17 billion as of December 31, 2005).

Separate account assets consist primarily of deposits from the Company’s variable annuity and variable life insurance business. Most separate account assets are invested in various mutual funds. All of the investment performance in the Company’s separate account assets is passed through to the Company’s customers. See Note 6 to the audited consolidated financial statements included in the F pages of this report for further information regarding the Company’s investments.

The Company, through its agent, lends certain portfolio holdings and in turn receives cash collateral. The cash collateral is invested in high-quality short-term investments. The Company’s policy requires a minimum of 102% of the fair value of the securities loaned to be maintained as collateral. Net returns on the investments, after payment of a rebate to the borrower, are shared between the Company and its agent. Both the borrower and the Company can request or return the loaned securities at any time. The Company maintains ownership of the securities at all times and is entitled to receive from the borrower any payments for interest or dividends received on such securities during the loan term.

As of December 31, 2006 and 2005, the Company had received $886.7 million and $1.17 billion, respectively, of cash collateral on securities lending and $171.0 million and $203.3 million, respectively, of cash for derivative collateral. As of December 31, 2006, the Company had not received any non-cash collateral on securities lending compared to $5.9 million as of December 31, 2005. Both the cash and non-cash collateral amounts are included in short-term investments with a corresponding liability recorded in other liabilities. As of December 31, 2006 and 2005, the Company had loaned securities with a fair value of $859.9 million and $1.14 billion, respectively. The Company also held $12.8 million and $53.2 million of securities as off-balance sheet collateral on derivative transactions as of December 31, 2006 and 2005, respectively.

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The following table summarizes the Company’s consolidated general account investments by asset category as of December 31:

	2006			2005
(dollars in millions)	Carrying value		% of total	Carrying value		% of total
Fixed maturity securities	$	28,160.0	68.3	$	30,106.0	69.7
Equity securities		67.6	0.2		75.6	0.2
Trading assets		24.3	0.1		34.4	0.1
Mortgage loans on real estate, net		8,909.8	21.6		9,148.6	21.2
Real estate, net		76.7	0.2		108.7	0.3
Policy loans		966.9	2.3		930.6	2.1
Other long-term investments		780.1	1.9		691.9	1.6
Short-term investments		2,215.6	5.4		2,073.2	4.8
Total	$	41,201.0	100.0	$	43,169.0	100.0

The following table lists the ten largest fixed maturity investment holdings by amortized cost for both investment grade and non-investment grade securities included in the general account as of December 31, 2006 (excluding U.S. Treasury securities, obligations of U.S. Government corporations, and agency bonds not backed by the full faith and credit of the U.S. Government):

(in millions)	Predominant Rating	Amortized Cost			Predominant Rating	Amortized Cost
Investment Grade				Non-Investment Grade
Bear Stearns Commercial Mortgage Securities, Inc.	AA+	$	177.1	Ford Motor Company	B	$	60.0
CS First Boston Mortgage Securities Corporation	AAA		175.5	General Motors Corporation	B-		46.5
Countrywide Alternative Loan Trust	AAA		174.9	Deluxe Corporation	BB-		42.7
Morgan Stanley Capital I	AAA		146.2	Knight-Ridder, Inc.	BB+		39.7
Structured Asset Securities Corporation	AAA		134.7	Northwest Airlines, Inc.	BB		38.3
Morgan Stanley Dean Witter Capital I	AA+		127.3	Scholastic Corporation	BB		37.9
HSBC Holdings PLC	AA-		115.5	NRG Energy, Inc.	BB-		25.9
Bank of America Corporation	AA-		114.9	Edison International	BB+		25.4
LB-UBS Commercial Mortgage Trust	AA+		104.8	Avis Europe, PLC	BB		25.0
Regions Financial Corporation	A		95.7	MGM Mirage	BB		21.6

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Securities Available-for-Sale

The following table summarizes the amortized cost, gross unrealized gains and losses, and estimated fair values of securities available-for-sale as of the dates indicated:

(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
December 31, 2006:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	179.0	$	12.2	$	2.1	$	189.1
Agencies not backed by the full faith and credit of the U.S. Government		564.5		46.2		2.3		608.4
Obligations of states and political subdivisions		274.7		0.7		7.4		268.0
Debt securities issued by foreign governments		36.2		1.7		0.2		37.7
Corporate securities
Public		9,732.8		220.0		127.4		9,825.4
Private		6,605.1		131.5		83.8		6,652.8
Mortgage-backed securities—U.S. Government-backed		6,946.0		23.8		122.8		6,847.0
Asset-backed securities		3,728.9		45.5		42.8		3,731.6
Total fixed maturity securities		28,067.2		481.6		388.8		28,160.0
Equity securities		57.2		11.0		0.6		67.6
Total securities available-for-sale	$	28,124.4	$	492.6	$	389.4	$	28,227.6
December 31, 2005:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	197.1	$	14.4	$	1.2	$	210.3
Agencies not backed by the full faith and credit of the U.S. Government		882.3		61.2		6.7		936.8
Obligations of states and political subdivisions		314.5		2.4		3.9		313.0
Debt securities issued by foreign governments		42.7		2.7		0.1		45.3
Corporate securities
Public		10,728.5		302.0		122.0		10,908.5
Private		7,199.3		200.7		77.5		7,322.5
Mortgage-backed securities—U.S. Government-backed		6,824.7		21.3		117.0		6,729.0
Asset-backed securities		3,641.7		44.2		45.3		3,640.6
Total fixed maturity securities		29,830.8		648.9		373.7		30,106.0
Equity securities		64.8		11.2		0.4		75.6
Total securities available-for-sale	$	29,895.6	$	660.1	$	374.1	$	30,181.6

The average duration and average maturity of the Company’s general account fixed maturity securities at December 31, 2006 were approximately 4.4 years and 5.9 years, respectively, compared to 4.5 years and 6.1 years, respectively, at December 31, 2005. The market value of the Company’s general account investments may fluctuate significantly in response to changes in interest rates. In addition, the Company may be likely to experience realized investment losses to the extent its liquidity needs require the disposition of general account fixed maturity securities in unfavorable interest rate environments.

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The following table summarizes by time the gross unrealized losses on securities available-for-sale in an unrealized loss position as of the dates indicated:

	Less than or equal to one year					More Than one year					Total
(in millions)	Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses
December 31, 2006:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	66.5	$	1.0		$	29.9	$	1.1		$	96.4	$	2.1
Agencies not backed by the full faith and credit of the U.S. Government		31.7		0.1			125.2		2.2			156.9		2.3
Obligations of states and political subdivisions		84.5		1.0			161.9		6.4			246.4		7.4
Debt securities issued by foreign governments		12.8		0.1			1.3		0.1			14.1		0.2
Corporate securities
Public		2,627.7		27.8			3,525.8		99.6			6,153.5		127.4
Private		1,288.6		15.0			2,165.1		68.8			3,453.7		83.8
Mortgage-backed securities—U.S. Government-backed		966.9		7.6			4,194.0		115.2			5,160.9		122.8
Asset-backed securities		580.2		4.5			1,475.0		38.3			2,055.2		42.8
Total fixed maturity securities		5,658.9		57.1			11,678.2		331.7			17,337.1		388.8
Equity securities		17.6		0.3			3.4		0.3			21.0		0.6
Total	$	5,676.5	$	57.4		$	11,681.6	$	332.0		$	17,358.1	$	389.4
% of gross unrealized losses				15	%				85	%
December 31, 2005:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	37.4	$	0.8		$	11.6	$	0.4		$	49.0	$	1.2
Agencies not backed by the full faith and credit of the U.S. Government		329.2		5.4			42.2		1.3			371.4		6.7
Obligations of states and political subdivisions		157.8		3.1			29.7		0.8			187.5		3.9
Debt securities issued by foreign governments		8.6		0.1			—		—			8.6		0.1
Corporate securities
Public		3,731.0		73.4			1,247.0		48.6			4,978.0		122.0
Private		1,957.3		46.5			767.7		31.0			2,725.0		77.5
Mortgage-backed securities—U.S. Government-backed		4,526.2		96.0			702.9		21.0			5,229.1		117.0
Asset-backed securities		1,516.4		28.2			490.2		17.1			2,006.6		45.3
Total fixed maturity securities		12,263.9		253.5			3,291.3		120.2			15,555.2		373.7
Equity securities		20.8		0.4			—		—			20.8		0.4
Total	$	12,284.7	$	253.9		$	3,291.3	$	120.2		$	15,576.0	$	374.1
% of gross unrealized losses				68	%				32	%

Increases in unrealized losses more than one year are primarily due to changes in the interest rate environment. Those securities are not considered other-than-temporarily impaired because the decline in market value is attributed to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until recovery.

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The NAIC assigns securities quality ratings and uniform valuations (called NAIC Designations), which are used by insurers when preparing their annual statements. The NAIC assigns designations to publicly traded and privately placed securities. The designations assigned by the NAIC range from class 1 (highest quality) to class 6 (lowest quality). Of the Company’s general account fixed maturity securities, 94% were in the two highest NAIC Designations as of December 31, 2006 compared to 94% as of December 31, 2005.

The following table summarizes the credit quality, as determined by NAIC Designation, of the Company’s general account fixed maturity securities portfolio as of December 31:

(in millions)		2006				2005
NAIC designation1	Rating agency equivalent designation2	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
1	Aaa/Aa/A	$	19,362.3	$	19,351.3	$	19,945.0	$	20,053.4
2	Baa		6,928.8		6,997.2		8,105.1		8,247.9
3	Ba		1,091.5		1,101.6		1,090.0		1,096.7
4	B		647.8		659.8		546.1		549.2
5	Caa and lower		18.5		27.3		53.3		60.5
6	In or near default		18.3		22.8		91.3		98.3
	Total	$	28,067.2	$	28,160.0	$	29,830.8	$	30,106.0

¹ NAIC Designations are assigned at least annually. Some designations for securities shown have been assigned to securities not yet assigned an NAIC Designation in a manner approximating equivalent public rating categories.

² Comparisons between NAIC and Moody’s designations are published by the NAIC. If no Moody’s rating is available, the Company assigns internal ratings corresponding to public ratings.

Mortgage-Backed Securities

The Company’s general account MBS portfolio is comprised of residential MBS investments. As of December 31, 2006, MBS investments totaled $6.85 billion (24%) of the carrying value of the Company’s general account fixed maturity securities available-for-sale compared to $6.73 billion (22%) as of December 31, 2005.

The Company believes that MBS investments add diversification, liquidity, credit quality and additional yield to its general account portfolio. The Company’s objective for its MBS portfolio is to provide reasonable cash flow stability and increased yield. The MBS portfolio includes CMOs, Real Estate Mortgage Investment Conduits (REMICs) and mortgage-backed pass-through securities. The Company’s general account MBS portfolio generally does not include interest-only securities, principal-only securities or other MBS investments which may exhibit extreme market volatility.

Prepayment/extension risk is an inherent risk of holding MBSs. However, the degree of prepayment/extension risk varies by the type of MBS held. The Company limits its exposure to prepayments/extensions by holding less volatile types of MBSs. As of December 31, 2006, $2.36 billion (34%) of the carrying value of the general account MBS portfolio was invested in planned amortization class CMOs/REMICs (PACs) compared to $2.43 billion (36%) as of December 31, 2005. PACs are securities whose cash flows are designed to remain constant in a variety of mortgage prepayment environments. Most of the Company’s non-PAC MBSs possess varying degrees of cash flow structure and prepayment/extension risk. The MBS portfolio contained 5% and 4% of pure pass-throughs as of December 31, 2006 and 2005, respectively.

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The following table summarizes the distribution by investment type of the Company’s general account MBS portfolio as of December 31:

	2006			2005
(dollars in millions)	Estimated fair value		% of total	Estimated fair value		% of total
Planned amortization class	$	2,362.9	34.4	$	2,434.4	36.2
Sequential		1,539.7	22.5		1,578.4	23.5
Non-accelerating securities—CMO		1,532.7	22.4		1,431.7	21.3
Very accurately defined maturity		784.6	11.5		823.8	12.2
Multi-family mortgage pass-through certificates		367.5	5.4		244.7	3.6
Accrual		116.8	1.7		160.2	2.4
Other		142.8	2.1		55.8	0.8
Total	$	6,847.0	100.0	$	6,729.0	100.0

Asset-Backed Securities

The Company’s general account asset-backed securities (ABS) portfolio includes home equity and credit card-backed ABS investments, among others. As of December 31, 2006, ABS investments totaled $3.73 billion (13%) of the carrying value of the Company’s general account fixed maturity securities available-for-sale compared to $3.64 billion (12%) as of December 31, 2005.

The Company believes that general account ABS investments add diversification, liquidity, credit quality and additional yield to its general account portfolio. Like the MBS portfolio, the Company’s objective for its ABS portfolio is to provide reasonable cash flow stability and increased yield. The Company’s general account ABS portfolio generally does not include interest-only securities, principal-only securities or other ABS investments which may exhibit extreme market volatility.

The following table summarizes the distribution by investment type of the Company’s general account ABS portfolio as of December 31:

	2006			2005
(dollars in millions)	Estimated fair value		% of total	Estimated fair value		% of total
Commercial mortgage-backed securities	$	1,245.8	33.5	$	860.8	23.6
Home equity/improvement		750.8	20.1		884.5	24.3
Credit card-backed		398.1	10.7		484.2	13.3
Trust preferred—residual income		326.5	8.7		210.6	5.8
CBO/CLO/CDO		225.6	6.0		264.4	7.3
Non-accelerated securities		189.6	5.1		205.4	5.6
Enhanced equity/equity trust certificates		146.9	3.9		170.0	4.7
Pass-through certificate		110.0	2.9		132.4	3.6
Student loans		84.5	2.3		89.5	2.5
Franchise/business loan		57.8	1.5		80.3	2.2
Other		196.0	5.3		258.5	7.1
Total	$	3,731.6	100.0	$	3,640.6	100.0

Private Placement Fixed Maturity Securities

The Company invests in private placement fixed maturity securities because of the generally higher nominal yield available compared to comparably rated public fixed maturity securities, more restrictive financial and

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business covenants available in private fixed maturity security loan agreements and stronger prepayment protection. Although private placement fixed maturity securities are not registered with the SEC and generally are less liquid than public fixed maturity securities, restrictive financial and business covenants included in private placement fixed maturity security loan agreements generally are designed to compensate for the impact of increased liquidity risk. A significant portion of the private placement fixed maturity securities that the Company holds are participations in issues that are also owned by other investors. In addition, some of these securities are rated by nationally recognized rating agencies, and substantially all have been assigned a rating designation by the NAIC, as shown in the earlier table summarizing the credit quality of the Company’s general account fixed maturity securities portfolio.

Mortgage Loans

As of December 31, 2006, general account mortgage loans were $8.91 billion (22%) of the carrying value of consolidated general account investments compared to $9.15 billion (21%) as of December 31, 2005. Substantially all of these loans were commercial mortgage loans. Commitments to fund mortgage loans of $139.5 million were outstanding as of December 31, 2006 compared to $293.7 million as of December 31, 2005.

The table below summarizes the carrying values of mortgage loans by regional exposure and type of collateral as of December 31, 2006:

(in millions)	Office		Warehouse		Retail		Apartment & Other		Total
New England	$	176.4	$	15.3	$	99.6	$	84.2	$	375.5
Middle Atlantic		196.3		328.4		359.2		186.0		1,069.9
East North Central		97.4		245.9		614.4		513.4		1,471.1
West North Central		40.2		90.2		65.9		138.3		334.6
South Atlantic		203.7		489.5		886.4		667.5		2,247.1
East South Central		34.6		58.0		127.8		164.1		384.5
West South Central		52.9		151.6		177.6		232.4		614.5
Mountain		114.7		136.8		206.4		354.9		812.8
Pacific		346.1		431.1		468.8		366.9		1,612.9
Total principal	$	1,262.3	$	1,946.8	$	3,006.1	$	2,707.7		8,922.9
Valuation allowance										(36.0	)
Unamortized premium										17.8
Cumulative change in fair value of hedged mortgage loans and commitments										5.1
Total mortgage loans on real estate, net									$	8,909.8

As of December 31, 2006, the Company’s largest exposure to any single borrowing group was $886.4 million, or 10%, of the Company’s general account mortgage loan portfolio compared to $844.3 million, or 9%, as of December 31, 2005.

As of December 31, 2006 and 2005, the Company’s mortgage loans classified as delinquent, foreclosed and restructured were immaterial as a percentage of the total mortgage loan portfolio.

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ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Sensitive Financial Instruments

The Company is subject to potential fluctuations in earnings and the fair value of certain of its assets and liabilities, as well as variations in expected cash flows due to changes in market interest rates and equity prices. The following discussion focuses on specific interest rate, foreign currency and equity price risks to which the Company is exposed and describes strategies used to attempt to manage these risks. The discussion is limited to financial instruments subject to market risks and is not intended to be a complete discussion of all of the risks to which the Company is exposed.

Interest Rate Risk

Fluctuations in interest rates can impact the Company’s earnings, cash flows and the fair value of its assets and liabilities. In a declining interest rate environment, the Company may be required to reinvest the proceeds from maturing and prepaying investments at rates lower than the overall yield of the portfolio, which could reduce future interest spread income. In addition, minimum guaranteed crediting rates (ranging from 1.5% to 3.5% for a majority of the individual annuity contracts in force) on certain individual annuity contracts could prevent the Company from lowering its interest crediting rates to levels commensurate with prevailing market interest rates, resulting in a reduction to the Company’s interest spread income in the event market interest rates remain at, or decline from, December 31, 2006 levels. The average crediting rate for fixed annuity products during 2006 was 3.76% and 4.07% for the Individual Investments and Retirement Plans segments, respectively (compared to 3.69% and 4.18%, respectively, during 2005), well in excess of the guaranteed rates.

The Company attempts to mitigate this risk by managing the maturity and interest-rate sensitivities of the assets to be consistent with those of the liabilities. In recent periods, management has taken actions to address low interest rate environments and the resulting impact on interest spread margins, including reducing commissions on fixed annuity sales, launching new products with new guaranteed rates, discontinuing the sale of its leading annual reset fixed annuities and invoking contractual provisions that limit the amount of variable annuity deposits allocated to the guaranteed fixed option. In addition, the Company adheres to a strict discipline of setting interest crediting rates on new business at levels adequate to provide returns consistent with management expectations.

Conversely, a rising interest rate environment could result in a reduction in interest spread income or an increase in policyholder surrenders. Existing general account investments supporting annuity liabilities had a weighted average maturity of approximately 5.8 years as of December 31, 2006. Therefore, the change in yield of the portfolio will lag changes in market interest rates. This lag increases if the rate of prepayments of securities slows. To the extent the Company sets renewal rates based on current market rates, this will result in reduced interest spreads. Alternatively, if the Company sets renewal crediting rates while attempting to maintain a desired spread from the portfolio yield, the rates offered by the Company may be less than new money rates offered by competitors. This difference could result in an increase in surrender activity by policyholders. If the Company was unable to fund surrenders with its cash flow from operations, the Company might need to sell assets, which likely would have declined in value due to the increase in interest rates. The Company attempts to mitigate this risk by offering products that assess surrender charges and/or market value adjustments at the time of surrender, and by managing the maturity and interest-rate sensitivities of the assets to approximate those of the liabilities.

Asset/Liability Management Strategies to Manage Interest Rate Risk

The Company employs an asset/liability management approach tailored to the specific requirements of each of its products. Each line of business has an investment policy based on its specific characteristics. The policy establishes asset maturity and duration, quality and other relevant guidelines.

An underlying pool or pools of investments, including combinations of dedicated and common asset pools, support each general account line of business. Dedicated pools of assets have been created for certain liabilities

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or groups of liabilities within most lines and represent the majority of the pools. These pools consist of whole assets purchased specifically for the underlying line of business. In general, assets placed in any given portfolio remain there until they mature (or are called), but active management of specific securities, sectors and several top-down risks may result in portfolio turnover or transfers among the various portfolios. The common asset pools are generally maintained on the basis of the desired maturity characteristics of the assets used (e.g., 4 to 7 years weighted average life). The various lines of business are given “ownership” percentages of assets acquired by the pools depending on their contribution to the amounts purchased in the pools, in a manner analogous to investment year allocations. This methodology is sometimes referred to as synthetic segmentation.

Investment strategies are executed by dedicated investment professionals based on the guidance established for the various pools. To assist them in this regard, they receive periodic projections of investment needs from each line’s management team. Line of business management teams, investment portfolio managers and finance professionals periodically evaluate how well assets purchased and the underlying portfolio match the underlying liabilities for each line. Strategy adjustments are made when needed.

Using this information, in conjunction with each line’s investment strategy, actual asset purchases or commitments are made. In addition, plans for future asset purchases are formulated when appropriate. This process is repeated frequently enough so that invested assets for each line match its investment needs as closely as possible. The primary objectives are to ensure that each line’s liabilities are invested in accordance with its investment strategy and that over or under investment is minimized.

As part of this process, the investment portfolio managers provide each line’s actuaries with forecasts of anticipated rates that the line’s future investments are expected to produce. This information, in combination with yields attributable to the line’s current investments and its investment “rollovers,” gives the line actuaries data to use in computing and declaring interest crediting rates for their lines of business in conjunction with management approval.

There are two approaches to developing investment policies:

• For liabilities where cash flows are not interest sensitive and the credited rate is fixed (e.g., immediate annuities), the Company attempts to manage risk with a combination cash matching/duration matching strategy. Duration is a measure of the sensitivity of price to changes in interest rates. For a rate movement of 100 basis points, the fair value of liabilities with a duration of 5 years would change by approximately 5%. For this type of liability, the Company generally targets an asset/liability duration mismatch of -0.25 to +0.50 years. In addition, the Company attempts to minimize asset and liability cash flow mismatches, especially over the first five years. However, the desired degree of cash matching is balanced against the cost of cash matching.

• For liabilities where the Company has the right to modify the credited rate and policyholders also have options, the Company’s risk management process includes modeling both the assets and liabilities over multiple stochastic scenarios. The Company considers a range of potential policyholder behavior as well as the specific liability crediting strategy. This analysis, combined with appropriate risk tolerances, drives the Company’s investment policy.

Use of Derivatives to Manage Interest Rate Risk

The Company periodically purchases fixed rate investments to back variable rate liabilities. As a result, the Company can be exposed to interest rate risk due to the mismatch between variable rate liabilities and fixed rate assets. In an effort to mitigate this risk, the Company enters into various types of derivative instruments to minimize this mismatch, with fluctuations in the fair values of the derivatives offsetting changes in the fair values of the investments resulting from changes in interest rates. The Company principally uses pay fixed/receive variable interest rate swaps to manage this risk.

Under these interest rate swaps, the Company receives variable interest rate payments and makes fixed rate payments. The fixed interest paid on the swap offsets the fixed interest received on the investment, resulting in

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the Company receiving the variable interest payments on the swap, generally 3-month U.S. LIBOR, and the credit spread on the investment. The net receipt of a variable rate will then match the variable rate paid on the liability.

As a result of entering into commercial mortgage loan and private placement commitments, the Company is exposed to changes in the fair value of such commitments due to changes in interest rates during the commitment period prior to the loans being funded. In an effort to manage this risk, the Company enters into short U.S. Treasury futures during the commitment period. With short U.S. Treasury futures, if interest rates rise/fall, the gains/losses on the futures will offset the change in fair value of the commitment attributable to the change in interest rates.

The Company periodically purchases variable rate investments (i.e., commercial mortgage loans and corporate bonds). As a result, the Company can be exposed to variability in cash flows and investment income due to changes in interest rates. Such variability poses risks to the Company when the assets are funded with fixed rate liabilities. In an effort to manage this risk, the Company may enter into receive fixed/pay variable interest rate swaps.

In using these interest rate swaps, the Company receives fixed interest rate payments and makes variable rate payments. The variable interest paid on the swap offsets the variable interest received on the investment, resulting in the Company receiving the fixed interest payments on the swap and the credit spread on the investment. The net receipt of a fixed rate will then match the fixed rate paid on the liability.

The Company manages interest rate risk at the segment level. Different segments may simultaneously hedge interest rate risks associated with owning fixed and variable rate investments considering the risk relevant to a particular segment.

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Characteristics of Interest Rate Sensitive Financial Instruments

The table below provides information about the Company’s financial instruments as of December 31, 2006 that are sensitive to changes in interest rates. Insurance contracts that subject the Company to significant mortality risk, including life insurance contracts and life-contingent immediate annuities, do not meet the definition of a financial instrument and are not included in the table.

	Estimated year of maturities/repayments														2006 Fair Value		2005 Fair Value
(in millions)	2007		2008		2009		2010		2011		There- after		Total
Assets
Fixed maturity securities:
Corporate bonds:
Principal	$	2,076.4	$	2,000.0	$	1,738.5	$	1,741.0	$	2,218.0	$	6,564.0	$	16,337.9	$	16,478.2	$	18,231.0
Weighted average interest rate		5.92%		5.94%		6.50%		6.06%		6.10%		6.16%		6.12%
Mortgage and other asset- backed securities:
Principal	$	1,236.8	$	951.9	$	841.9	$	887.9	$	902.5	$	5,853.9	$	10,674.9	$	10,578.6	$	10,369.6
Weighted average interest rate		5.69%		5.30%		5.44%		5.42%		5.62%		5.54%		5.52%
Other fixed maturity securities:
Principal	$	46.7	$	59.0	$	77.2	$	39.6	$	48.4	$	783.5	$	1,054.4	$	1,103.2	$	1,505.4
Weighted average interest rate		5.31%		5.22%		5.78%		5.03%		5.06%		6.26%		6.02%
Mortgage loans on real estate:
Principal	$	217.6	$	331.2	$	343.7	$	498.1	$	1,083.3	$	6,078.7	$	8,552.6	$	8,821.5	$	9,181.5
Weighted average interest rate		6.71%		6.02%		6.35%		6.53%		6.47%		6.08%		6.18%
Liabilities
Individual deferred fixed annuities:
Principal	$	2,394.5	$	1,705.1	$	1,337.0	$	1,149.1	$	1,013.7	$	4,141.4	$	11,740.8	$	10,571.4	$	12,515.4
Weighted average crediting rate		3.24%		3.14%		3.15%		3.22%		3.29%		3.30%
Group pension deferred fixed annuities:
Principal	$	1,572.1	$	1,365.1	$	1,172.7	$	1,027.6	$	837.1	$	5,188.5	$	11,163.1	$	10,978.0	$	10,880.1
Weighted average crediting rate		4.08%		4.05%		4.04%		4.04%		4.04%		4.05%
Funding agreements backing MTNs:
Principal	$	2,014.9	$	1,064.6	$	775.2	$	522.2	$	357.7	$	—	$	4,734.6	$	4,611.8	$	3,998.3
Weighted average crediting rate		4.45%		4.44%		4.30%		4.26%		2.59%		—
Immediate annuities:
Principal	$	253.2	$	225.5	$	199.1	$	168.9	$	144.5	$	915.4	$	1,906.6	$	449.0	$	432.0
Weighted average crediting rate		6.63%		6.68%		6.72%		6.77%		6.83%		6.88%
Short-term debt:
Principal	$	85.2	$	—	$	—	$	—	$	—	$	—	$	85.2	$	85.2	$	252.3
Weighted average interest rate		5.32%		—		—		—		—		—		5.32%
Long-term debt:
Principal	$	—	$	—	$	—	$	—	$	—	$	1,398.5	$	1,398.5	$	1,437.5	$	1,466.5
Weighted average interest rate		—		—		—		—		—		6.41%		6.41%

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	Estimated year of maturities/repayments														2006 Fair Value			2005 Fair Value
(in millions, except settlement prices)	2007		2008		2009		2010		2011		There- after		Total
Derivative Financial Instruments
Interest rate swaps:
Pay fixed/receive variable:
Notional value	$	273.8	$	413.3	$	563.4	$	403.8	$	841.3	$	549.5	$	3,045.1	$	(95.4	)	$	(69.6	)
Weighted average pay rate		4.61%		4.80%		4.96%		4.87%		5.01%		5.16%		4.95%
Weighted average receive rate1		5.40%		5.37%		5.37%		5.43%		5.50%		5.45%		5.43%
Pay fixed/receive variable, forward starting:
Notional value	$	—	$	—	$	—	$	—	$	—	$	177.9	$	177.9	$	(0.8	)	$	(0.2	)
Weighted average pay rate		—		—		—		—		—		5.13%		5.13%
Weighted average receive rate		—		—		—		—		—		5.36%		5.36%
Pay variable/receive fixed:
Notional value	$	489.4	$	228.8	$	—	$	—	$	253.8	$	36.5	$	1,008.5	$	214.1		$	280.4
Weighted average pay rate1		5.74%		5.37%		—		—		5.88%		6.49%		5.72%
Weighted average receive rate		4.56%		5.21%		—		—		6.18%		5.33%		5.14%
Pay variable/receive variable:
Notional value	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—		$	13.5
Weighted average pay rate1		—		—		—		—		—		—		—
Weighted average receive rate1		—		—		—		—		—		—		—
Pay fixed/receive fixed:
Notional value	$	44.0	$	16.8	$	64.1	$	56.8	$	67.8	$	135.5	$	385.0	$	(46.4	)	$	(42.6	)
Weighted average pay rate		5.98%		5.83%		5.73%		3.56%		5.61%		5.10%		5.20%
Weighted average receive rate		3.34%		4.04%		4.16%		4.60%		5.28%		6.10%		5.00%
Convertible asset swaps:
Notional value	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—		$	0.2
Weighted average pay rate		—		—		—		—		—		—		—
Weighted average receive rate		—		—		—		—		—		—		—
Credit default swaps sold:
Notional value	$	106.0	$	115.0	$	24.5	$	55.0	$	16.0	$	25.0	$	341.5	$	2.5		$	3.0
Weighted average receive rate		1.00%		0.57%		0.59%		0.73%		1.76%		0.40%		0.77%
Credit default swaps purchased:
Notional value	$	0.5	$	11.5	$	0.8	$	—	$	0.5	$	22.0	$	35.3	$	(0.2	)	$	—
Weighted average pay rate		5.00%		1.10%		5.00%		—		—		0.56%		0.89%
Embedded derivatives:
Notional value	$	—	$	—	$	—	$	—	$	—	$	20.0	$	20.0	$	54.5		$	7.2
Total return swaps2
Notional value	$	75.0	$	—	$	—	$	—	$	—		—	$	75.0	$	0.1		$	0.1
Treasury futures:
Short positions:
Contract amount/notional value	$	4.4	$	—	$	—	$	—	$	—	$	—	$	4.4	$	—		$	—
Weighted average settlement price		106.7		—		—		—		—		—		106.7
Long positions:
Contract amount/notional value	$	161.6	$	—	$	—	$	—	$	—	$	—	$	161.6	$	(2.1	)	$	0.3
Weighted average settlement price		108.8		—		—		—		—		—		108.8
Equity futures:
Short positions:
Contract amount/notional value	$	104.3	$	—	$	—	$	—	$	—	$	—	$	104.3	$	(0.2	)	$	1.4
Weighted average settlement price		1,426.4		—		—		—		—		—		1,426.4
Long positions:
Contract amount/notional value	$	1.3	$	—	$	—	$	—	$	—	$	—	$	1.3	$	—		$	—
Weighted average settlement price		1,427.1		—		—		—		—		—		1,427.1
Option contracts
Long positions:
Contract amount/notional value	$	88.5	$	11.2	$	92.7	$	218.3	$	571.1	$	602.5	$	1,584.3	$	70.0		$	30.8
Weighted average settlement price		1,333.7		972.7		1,068.4		1,124.3		1,035.0		1,128.0		1,100.9

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¹ Variable rates are generally based on 1, 3 or 6-month U.S. LIBOR and reflect the effective rate as of December 31, 2006.

² Total return swaps are based on the Lehman CMBS Index.

Additional information about the characteristics of the financial instruments and assumptions underlying the data presented in the table above are as follows:

Mortgage-backed and other asset-backed securities: The year of maturity is determined based on the terms of the securities and the current rate of prepayment of the underlying pools of mortgages or assets. The Company limits its exposure to prepayments by purchasing less volatile types of MBS and ABS investments. See Part II, Item 7—MD&A—Investments—Securities Available-for-Sale for further discussion.

Corporate bonds and other fixed maturity securities and mortgage loans on real estate: The maturity year is that of the security or loan.

Individual deferred fixed annuities: The maturity year is based on the expected date of policyholder withdrawal, taking into account actual experience, current interest rates and contract terms. Individual deferred fixed annuities are certain individual annuity contracts, which are also subject to surrender charges calculated as a percentage of the deposits made and assessed at declining rates during the first seven years after a deposit is made. Also included in deferred fixed annuities were $1.27 billion of participating group annuity contracts in 2006 ($7.06 billion in 2005). As of December 31, 2006, individual annuity general account liabilities totaling $5.12 billion ($6.38 billion in 2005) were in contracts where the crediting rate is reset periodically, with portions resetting in each calendar quarter, and $795.9 million that reset annually in 2006 compared to $936.9 million in 2005. Individual fixed annuity policy reserves of $2.29 billion in 2006 ($3.33 billion in 2005) were in contracts that adjust the crediting rate every five years. Individual fixed annuity policy reserves of $684.0 million in 2006 were in contracts that adjust the crediting rate every three years compared to $926.2 million in 2005. The average crediting rate is calculated as the difference between the projected yield of the assets backing the liabilities and a targeted interest spread. However, for certain individual annuities the credited rate is also adjusted to partially reflect current new money rates.

Group pension deferred fixed annuities: The maturity year is based on the expected date of policyholder withdrawal, taking into account actual experience, current interest rates and contract terms. Included were group annuity contracts representing $11.13 billion and $11.19 billion of general account liabilities as of December 31, 2006 and 2005, respectively, which are generally subject to market value adjustment upon surrender and which also may be subject to surrender charges. Of the total group annuity liabilities, $6.4 million ($5.8 million in 2005) were in contracts where the crediting rate is reset monthly, $9.76 billion ($9.69 billion in 2005) were in contracts where the crediting rate is reset quarterly, $484.6 million ($530.3 million in 2005) were in contracts that adjust the crediting rate on an annual basis with portions resetting in each calendar quarter and $905.6 million ($960.8 million in 2005) were in contracts where the crediting rate is reset annually on January 1.

Funding agreements backing MTNs: As of December 31, 2006 and 2005, fixed annuity policy reserves of $4.60 billion and $4.00 billion, respectively, relate to funding agreements issued in conjunction with the Company’s MTN program where the crediting rate is either fixed for the term of the contract or variable, based on an underlying index.

Immediate annuities: Non-life contingent contracts in payout status where the Company has guaranteed periodic payments, typically monthly, are included. The maturity year is based on the terms of the contract.

Short-term debt and long-term debt: The maturity year is the stated maturity date of the obligation. While certain obligations are callable, either at a premium or with a make-whole provision, the Company currently has no plans to call the obligations prior to the stated maturity date.

Derivative financial instruments: The maturity year is based on the terms of the related contract. Interest rate swaps include cross-currency interest rate swaps that eliminate all of the Company’s existing asset and

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liability foreign currency exposure. Cross-currency interest rate swaps in place against each foreign currency obligation hedge the Company against adverse currency movements with respect to both period interest payments and principal repayment. Underlying details by currency have therefore been omitted. Variable swap rates and settlement prices reflect rates and prices in effect as of December 31, 2006.

Foreign Currency Risk Management

In conjunction with the Company’s MTN program, the Company periodically issues both fixed and variable rate liabilities denominated in foreign currencies. As a result, the Company is exposed to changes in fair value of the liabilities due to changes in foreign currency exchange rates and related interest rates. In an effort to manage these risks, the Company enters into cross-currency interest rate swaps to convert these liabilities to a U.S. dollar rate.

The Company is exposed to changes in fair value of fixed rate investments denominated in a foreign currency due to changes in foreign currency exchange rates and related interest rates. In an effort to manage this risk, the Company uses cross-currency interest rate hedges to swap these asset characteristics to variable U.S. dollar rate instruments. Cross-currency interest rate swaps on assets are structured to pay a fixed rate, in the foreign currency, and receive a variable U.S. dollar rate, generally 3-month U.S. LIBOR. These derivative instruments are designated as a fair value hedge of the fixed rate foreign denominated asset.

For a variable rate foreign liability, the cross-currency interest rate swap is structured to receive a variable rate, in the foreign currency, and pay a variable U.S. dollar rate, generally 3-month U.S. LIBOR. As both sides of the cross-currency interest rate swap are variable, the derivative instrument is a basis swap. While the receive-side terms of the cross-currency interest rate swap will line up with the terms of the liability, the Company is not able to match the pay-side terms of the derivative to a specific asset. Therefore, these derivative instruments do not receive hedge accounting treatment.

Cross-currency interest rate swaps on variable rate investments are structured to pay a variable rate, in the foreign currency, and receive a fixed U.S. dollar rate. The terms of the foreign currency paid on the swap will exactly match the terms of the foreign currency received on the asset, thus eliminating currency risk. These derivative instruments are designated as a cash flow hedge.

Equity Market Risk

Asset fees calculated as a percentage of the separate account assets are a significant source of revenue to the Company. As of December 31, 2006, approximately 83% of separate account assets were invested in equity mutual funds (approximately 83% as of December 31, 2005). Gains and losses in the equity markets result in corresponding increases and decreases in the Company’s separate account assets and asset fee revenue. In addition, a decrease in separate account assets may decrease the Company’s expectations of future profit margins due to a decrease in asset fee revenue and/or an increase in guaranteed contract claims, which also may require the Company to accelerate the amortization of DAC.

The Company’s long-term assumption for net separate account returns is 8% annual growth. If equity markets were unchanged throughout a given year, the Company estimates that its net earnings per diluted share, calculated using current weighted average diluted shares outstanding, would be approximately $0.05 to $0.10 less than had the Company’s long-term assumption for net separate account returns been realized. This analysis assumes no other factors change and that an unlocking of DAC assumptions would not be required. However, as it does each quarter, the Company would evaluate its DAC balance and underlying assumptions to determine whether unlocking is appropriate. The Company can provide no assurance that the experience of flat equity market returns would not result in changes to other factors affecting profitability, including the possibility of unlocking of DAC assumptions.

Many of the Company’s individual variable annuity contracts offer GMDB features. A GMDB generally provides a benefit if the annuitant dies and the contract value is less than a specified amount, which may be based

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on the premiums paid less amounts withdrawn or contract value on a specified anniversary date. A decline in the stock market causing the contract value to fall below this specified amount, which varies from contract to contract based on the date the contract was entered into as well as the GMDB feature elected, will increase the net amount at risk, which is the GMDB in excess of the contract value. This could result in additional GMDB claims.

In an effort to mitigate this risk, the Company has implemented a GMDB economic hedging program for certain new and existing business. Prior to implementation of the GMDB hedging program in 2000, the Company managed this risk primarily by entering into reinsurance arrangements. The GMDB economic hedging program is designed to offset changes in the economic value of the GMDB obligation up to a return of the contractholder’s premium payments. However, the first 10% of GMDB claims are not hedged. Currently the program shorts S&P 500 Index futures, which provides an offset to changes in the value of the designated obligation. The futures are not designated as hedges and, therefore, hedge accounting is not applied. The Company’s economic evaluation of the GMDB obligation is not consistent with current accounting treatment of the GMDB obligation. Therefore, the hedging activity is likely to lead to earnings volatility. This volatility was negligible in 2006. As of December 31, 2006 and 2005, the net amount at risk was $574.3 million and $1.10 billion before reinsurance, respectively, and $122.2 million and $184.3 million net of reinsurance, respectively. As of December 31, 2006 and 2005, the Company’s reserve for GMDB claims was $29.6 million and $27.2 million, respectively. See Note 3 to the audited consolidated financial statements included in the F pages of this report for discussion of the impact of adopting a new accounting principle regarding GMDB reserves in 2004.

The Company also offers certain variable annuity products with a GMAB rider. A GMAB provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified period of time (5, 7 or 10 years) selected by the contractholder at the time of issuance of the variable annuity contract. In some cases, the contractholder also has the option, after a specified period of time, to drop the rider and continue the variable annuity contract without the GMAB. The design of the GMAB rider limits the risk to the Company in a variety of ways including asset allocation requirements, which serve to reduce the Company’s potential exposure to underlying fund performance risks. Specifically, the GMAB terms limit asset allocation by (1) requiring partial allocation of assets to a guaranteed term option (a fixed rate investment option) and excluding certain funds that are highly volatile or difficult to hedge or (2) requiring all assets be allocated to one of the approved asset allocation funds or models defined by the Company. A GMAB represents an embedded derivative in the variable annuity contract that is required to be separated from, and valued apart from, the host variable annuity contract. The embedded derivative is carried at fair value and reported in other future policy benefits and claims. The Company initially records an offset to the fair value of the embedded derivative on the balance sheet, which is amortized through the income statement over the term of the GMAB period of the contract. Subsequent changes in the fair value of the embedded derivative are recognized in earnings. The fair value of the GMAB embedded derivative is calculated based on actuarial assumptions related to the projected benefit cash flows incorporating numerous assumptions including, but not limited to, expectations of contractholder persistency, market returns, correlations of market returns and market return volatility.

The Company began selling contracts with the GMAB feature on May 1, 2003. Beginning October 1, 2003, the Company launched an enhanced version of the rider that offered increased equity exposure to the contractholder in return for a higher charge. The Company simultaneously began economically hedging the GMAB exposure for those risks that exceed a level it considered acceptable. The GMAB economic hedge consists of shorting interest rate futures and S&P 500 Index futures contracts and does not qualify for hedge accounting under current guidance. Quarterly, the Company purchases S&P 500 Index put options and over-the-counter basket put options, which are constructed in order to minimize the tracking error of the hedge and the GMAB liability. See Note 2(c) to the audited consolidated financial statements included in the F pages of this report for discussion of economic hedges. The objective of the GMAB economic hedge strategy is to manage the exposures with risk beyond a level considered acceptable to the Company. The Company is exposed to equity market risk related to the GMAB feature should the growth in the underlying investments, including any GTO investment, fail to reach the guaranteed return level. The GMAB embedded derivative is likely to create volatility in earnings; however, the economic hedging program provides substantial mitigation of this exposure. This

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volatility was negligible in 2006 and 2005. As of December 31, 2006 and 2005, the balance of the GMAB embedded derivative was $116.3 million and $67.9 million, respectively. The increase in the balance of the GMAB embedded derivative was driven by the value of new business sold during 2006.

Beginning in March 2005, the Company began offering a hybrid GMAB/GLWB through its CPPLI contract rider. This living benefit combines a GMAB feature in its first 5-10 years with a lifetime withdrawal benefit which begins upon the maturity of the GMAB and extends for the duration of the insured’s life. In the event that the insured’s contract value is exhausted through such withdrawals, the Company will continue to fund future withdrawals at a pre-defined level until the insured’s death. In some cases, the contract owner has the right to drop the GLWB portion of this rider or periodically reset the guaranteed withdrawal basis to a higher level. This benefit requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy as previously described above.

In March 2006, the Company added L.INC, a stand-alone GLWB, to compliment CPPLI in its product offerings. This rider is very similar to the hybrid benefit discussed above. L.INC provides for enhanced retirement income security via guaranteed accumulation rates and withdrawal rates that increase with age without the liquidity loss associated with annuitization. The lifetime withdrawal feature also is being economically hedged. Currently, the Company is using S&P 500 Index futures and U.S. Treasury futures to hedge exposure to declining equity and interest rate markets, respectively. Similar to GMDBs, the Company’s economic valuation of the lifetime income obligation is not consistent with the accounting treatment of the obligation. Therefore, hedging activity is likely to create volatility in earnings; however, the economic hedging program provides substantial mitigation of this exposure. This volatility was negligible in 2006.

Inflation

The rate of inflation did not have a material effect on the revenues or operating results of the Company during 2006, 2005 or 2004.

ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Part IV, Item 15—Exhibits, Financial Statement Schedules for an index to the Company’s audited consolidated financial statements included in the F pages of this report.

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on such evaluation, such officers have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Annual Report.

Management Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system was designed to provide reasonable assurance to management and its Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the preparation and presentation of financial statements.

The Company’s management assessed the effectiveness of NFS’ internal control over financial reporting as of December 31, 2006. In making this assessment, the Company’s management used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on those criteria, the Company’s management concluded that NFS’ internal control over financial reporting was effective as of December 31, 2006.

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The Company’s independent registered public accounting firm, KPMG LLP, issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. This report appears on page F-2.

Changes in Internal Control Over Financial Reporting

Effective April 1, 2006, the Company implemented a series of new enterprise resource planning (ERP) modules, including a new general ledger and chart of accounts and new consolidation, reporting and purchasing tools. The introduction of these new ERP modules and the related workflow changes resulted in changes to many of the Company’s financial reporting controls and procedures. Such changes were identified and planned prior to their introduction into the Company’s internal controls over financial reporting. Following implementation, these new controls were validated according to the Company’s established processes. The integration of the ERP modules and related workflow changes were substantially completed during 2006. The system changes were undertaken to standardize accounting systems, improve management reporting and consolidate accounting functions for the Company, its subsidiaries and affiliates, and were not undertaken in response to any actual or perceived significant deficiencies in the Company’s internal control over financial reporting.

There have been no changes during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B    OTHER INFORMATION

None.

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PART III

ITEM 10    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information set forth under the captions “Proposal 1—Election of Directors—Nominees for Class I Directors,—Class II Directors, and—Class III Directors,” “Biographical Information—Directors,” “Section 16 Beneficial Ownership Compliance,” “The Board of Directors and its Committees—Additional Governance Policies—Code of Conduct and Business Practices,” the first paragraph under “The Board of Directors and its Committees—Audit Committee,” and the second paragraph under “The Board of Directors and its Committees—Audit Committee—Audit Committee Membership” in NFS’ 2007 Proxy Statement is incorporated herein by reference.

Executive Officers of the Registrant

Name	Age	Position with NFS (as of February 27, 2007)
W.G. Jurgensen	55	Chief Executive Officer
Mark R. Thresher	50	President and Chief Operating Officer
Patricia R. Hatler	52	Executive Vice President—Chief Legal and Governance Officer
Terri L. Hill	47	Executive Vice President—Chief Administrative Officer
Michael C. Keller	47	Executive Vice President—Chief Information Officer
James R. Lyski	44	Executive Vice President—Chief Marketing Officer
Stephen S. Rasmussen	54	Executive Vice President
Robert A. Rosholt	56	Executive Vice President—Finance, Investments and Strategy
Anne L. Arvia	43	Senior Vice President—Nationwide Bank
John L. Carter	44	Senior Vice President—Non-Affiliated Sales
Timothy G. Frommeyer	42	Senior Vice President—Chief Financial Officer
Peter A. Golato	53	Senior Vice President— Individual Protection Business Head
Harry H. Hallowell	46	Senior Vice President and Treasurer
Kelly A. Hamilton	42	Senior Vice President—Internal Audits
William S. Jackson	53	Senior Vice President—Nationwide Retirement Plans
Gregory S. Lashutka	62	Senior Vice President—Corporate Relations
Keith I. Millner	46	Senior Vice President—Retail Distribution and In-Retirement Business
Brian W. Nocco	54	Senior Vice President—Enterprise Chief Risk Officer
Gail G. Snyder	52	Senior Vice President—Chief Investment Officer

Business experience for each of the individuals listed in the above table is set forth below:

W.G. Jurgensen has been Chief Executive Officer of NFS and several subsidiaries of NFS since August 2000 and a director of NFS since May 2000. He served as Chairman of the Board of NFS from January 2001 to June 2003 and Chief Executive Officer—Elect from May to August 2000. Since August 2000, he has been Chief Executive Officer of NMIC, Nationwide Mutual Fire Insurance Company (Nationwide Mutual Fire), NLIC and NLAIC, and was Chief Executive Officer—Elect of those companies from May to August 2000. He also serves as Chief Executive Officer of several other companies within Nationwide, which is comprised of NFS, NMIC, Nationwide Mutual Fire and all of their respective subsidiaries and affiliates (collectively, Nationwide). Mr. Jurgensen has been a director of NMIC, Nationwide Mutual Fire, NLIC and NLAIC since May 2000 and serves as a director of several other companies within Nationwide, as well as a trustee of Nationwide Foundation, a not-for-profit corporation that contributes to nonprofit agencies and community projects. Mr. Jurgensen has been a director of ConAgra Foods, Inc., a producer and marketer of food products, since August 2002. Before joining Nationwide, Mr. Jurgensen was Executive Vice President of Bank One Corporation (now JP Morgan Chase & Co.), an investment banking and financial services institution, from 1998 to May 2000. He served as Executive Vice President of First Chicago NBD Corporation, a financial institution, and Chairman of FCC National Bank, a financial institution, from 1996 to May 1998.

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Mark R. Thresher has been President and Chief Operating Officer of NFS, NLIC and NLAIC since May 2004. He was President and Chief Operating Officer—Elect from April 2004 to May 2004; President and Chief Operating Officer—Elect and Chief Financial Officer from December 2003 to April 2004; and Senior Vice President—Chief Financial Officer from November 2002 to December 2003 of NFS, NLIC and NLAIC. Mr. Thresher also served NFS as its Senior Vice President—Chief Financial Officer and Treasurer from November 2002 to December 2003; Senior Vice President—Finance and Treasurer from May 1999 to November 2002; and Vice President—Finance and Controller from December 1996 to May 1999. He was Senior Vice President—Finance of NLIC and NLAIC from May 1999 to November 2002, and Vice President—Controller of those companies from December 1996 to May 1999. He also served as Vice President and Treasurer of several other companies within Nationwide from June 1996 to August 1996. Prior to joining Nationwide, Mr. Thresher served as a partner with KPMG LLP, a public accounting firm, from July 1988 to May 1996.

Patricia R. Hatler has been Executive Vice President—Chief Legal and Governance Officer of NFS since December 2004. Previously, Ms. Hatler served NFS as its Executive Vice President and General Counsel from October 2004 to December 2004; Executive Vice President, General Counsel and Secretary from March 2003 to October 2004; Senior Vice President, General Counsel and Secretary from May 2000 to March 2003; and Senior Vice President and General Counsel from August 1999 to May 2000. She has been Executive Vice President and Chief Legal and Governance Officer of several other companies within Nationwide since December 2004 and held similar positions with several Nationwide companies, including Executive Vice President, General Counsel and Secretary, since July 1999. Prior to that time, she was General Counsel and Corporate Secretary of Independence Blue Cross, a health insurance provider, from 1983 to July 1999.

Terri L. Hill has been Executive Vice President—Chief Administrative Officer of NFS and several other Nationwide companies since September 2003. She was Senior Vice President—Human Resources/Operations for Scottsdale Insurance Company (Scottsdale), a wholly-owned subsidiary of NMIC, and its affiliates from December 2000 to September 2003; Vice President—Human Resources/Communications of Scottsdale from May 1997 to December 2000; and Vice President—Human Resources of Scottsdale from October 1996 to May 1997. Ms. Hill was Vice President—Human Relations from February 1985 to September 1996 at American Express, a diversified worldwide travel, financial and network services company, and Director of Personnel for Bullock’s Department Stores, a department store retailer, from August 1981 to February 1985.

Michael C. Keller has been Executive Vice President—Chief Information Officer of NFS since August 2001. Mr. Keller has been Executive Vice President—Chief Information Officer of several other companies within Nationwide since June 2001. Prior to that time, Mr. Keller was Senior Vice President of Bank One, a financial institution, from January 1998 to June 2001, and held various management positions with IBM Corporation, an information technology company, from July 1982 to December 1997.

James R. Lyski has been Executive Vice President—Chief Marketing Officer of NFS since October 2006. Mr. Lyski previously served as Senior Vice President for Strategy, Product and Marketing at CIGNA HealthCare, Inc., an employee benefits company, from October 2002 to October 2006; as Chief Operating Officer of Atabok, Inc., a Boston-based technology company, from June 2000 to October 2002; and as Vice President for U.S. Marketing at FedEx Corporation, a global shipping company, from August 1989 to May 2000.

Stephen S. Rasmussen has been Executive Vice President of NFS and President and Chief Operating Officer of NMIC and Nationwide Mutual Fire since September 2003. Mr. Rasmussen is also a Director, President and Chief Operating Officer of ALLIED Group, Inc., a wholly-owned subsidiary of NMIC, and serves as Chairman and Director of several Allied subsidiaries. He also serves as a Director of several other companies within Nationwide. Prior to NMIC’s acquisition of ALLIED Group, Inc., Mr. Rasmussen was President and Chief Operating Officer of that company and its subsidiaries from December 2000 to September 2003 and held various management positions with those companies from 1974 to December 2000.

Robert A. Rosholt has been Executive Vice President—Finance, Investments and Strategy of NFS since October 2002. Since January 2006, he has served as Executive Vice President—Chief Financial Officer of NMIC

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and several other companies within Nationwide. He served as Executive Vice President—Chief Finance and Investment Officer of NMIC and several other companies within Nationwide from October 2002 to December 2005. He also serves as a Director of several Nationwide companies. Prior to joining Nationwide, Mr. Rosholt was Executive Vice President and Head of Operations of AON Corporation, a provider of risk management, retail, reinsurance, and wholesale brokerage, claims management, and human capital consulting services, from September 2000 to October 2002, and held various management positions, including Chief Financial Officer, with Bank One from June 1974 to May 2000.

Anne L. Arvia has been Senior Vice President—Nationwide Bank since September 2006. Prior to joining Nationwide Bank, Ms. Arvia served as the Chief Executive Officer of ShoreBank, a community and environmental bank, from May 2002 to August 2006; as the President of ShoreBank from May 2001 to August 2006; and held various other positions with ShoreBank from May 1991 to April 2002.

John L. Carter has been Senior Vice President—Non-Affiliated Sales of NFS, NLIC and NLAIC and President of Nationwide Financial Distributors, Inc., as well as Senior Vice President of several other Nationwide companies, since November 2005. Previously, he served as Corporate Vice President of Platform Distribution at Prudential Financial, a financial services company, from August 1999 to November 2005. Prior to that time, Mr. Carter held positions with other financial services firms, including Kidder Peabody, where he served in executive sales positions, and UBS.

Timothy G. Frommeyer has been Senior Vice President—Chief Financial Officer of NFS and several other Nationwide companies since November 2005. He served as Vice President and Chief Actuary of NLIC and NLAIC from May 2004 to November 2005. He also served as Senior Vice President—Finance and Actuarial of NRS from November 2001 to May 2004 and Vice President—Public Sector Finance and Actuarial of NLIC and NLAIC from November 2001 to May 2004. From April 2000 to May 2001, Mr. Frommeyer served as Associate Vice President—Public Sector and Retail Actuarial of NLIC and NLAIC. Prior to that time, he held various other positions within Nationwide.

Peter A. Golato has been Senior Vice President—Individual Protection Business Head of NFS and several other companies within Nationwide since May 2004. Mr. Golato also serves as a Director (since May 2004) and President (since August 2004) of NLICA, NLACA and Nationwide Life Insurance Company of Delaware (NLIC of Delaware). Previously, he was Vice President—Brokerage Life Sales of NLIC and NLAIC from May 2000 to May 2004, and NMIC and Nationwide Mutual Fire from May 2000 to October 2004. Mr. Golato held various positions within Nationwide from March 1993 to May 2000. Prior to that time, he was Marketing Manager for Aetna Life and Casualty Company, a provider of managed care benefits and dental, pharmacy, vision, and group insurance coverage, from September 1976 to March 1993.

Harry H. Hallowell has been Senior Vice President and Treasurer of NFS and several other companies within Nationwide since January 2006. Previously, Mr. Hallowell served as Vice President and Head Portfolio Risk Manager for Nationwide’s Office of Investments from May 2003 to December 2005. From 1984 to 2003, he served as a Senior Vice President and Head of Corporate Funding for Bank One Corporation.

Kelly A. Hamilton has been Senior Vice President—Internal Audits of NFS and several other companies within Nationwide since September 2005. She served several Nationwide companies as Senior Vice President—PC Finance, from September 2003 to August 2005; Vice President—Corporate Controller, from August 2001 to September 2003, and Associate Vice President—Corporate Accounting Services, from April 2000 to August 2001. Additionally, Ms. Hamilton held other positions within Nationwide starting in July 1995. Ms. Hamilton also serves as a Director of several Nationwide companies. Previously, she held a variety of management and accounting positions at KPMG LLP from January 1986 to July 1995.

William S. Jackson has been Senior Vice President, Nationwide Retirement Plans, of NFS since October 2006. Previously, Mr. Jackson served as Sales Center Vice President from August 2001 to September 2006; as Sales Financial Services Sales Officer from February 1999 to August 2001; and in various other positions within Nationwide since 1984.

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Gregory S. Lashutka has been Senior Vice President—Corporate Relations of NFS and several other companies within Nationwide since January 2000. Prior to that time, he was Mayor of the City of Columbus (Ohio) from January 1992 to December 1999.

Keith I. Millner has been Senior Vice President—Retail Distribution and In-Retirement Business of NFS since January 2006. He served as Senior Vice President—In-Retirement Business Head of NFS and several other companies within Nationwide from January 2005 to January 2006. Prior to joining Nationwide, Mr. Millner was a Senior Vice President for CIGNA HealthCare, a health insurance provider, from August 2002 to December 2004; an independent consultant from September 2001 to August 2002; and served as Senior Vice President and in other positions for Assurant Group, an insurance and related product marketing firm (formerly a subsidiary of Fortis, Inc., a financial services firm) from March 1996 to September 2001.

Brian W. Nocco has been Senior Vice President—Enterprise Chief Risk Officer of NFS and several other companies within Nationwide since January 2006. Previously he was Senior Vice President and Treasurer of NFS from December 2002 to January 2006 and Senior Vice President and Treasurer of NMIC from April 2001 to January 2006. He was Senior Vice President and Assistant Treasurer of NFS from April 2001 to December 2002. Mr. Nocco has been Senior Vice President and Assistant Treasurer of NLICA, NLACA and NLIC of Delaware since October 2002 and serves as Senior Vice President and Treasurer of several other companies within Nationwide. Prior to that time, he was Executive Vice President of Imperial Bank, a financial institution, and its subsidiaries, from May 1998 to June 2000. Mr. Nocco was Senior Vice President—Chief Compliance Officer with The Chubb Corporation, a holding company whose subsidiaries are engaged in property and casualty insurance, life insurance and real estate, from 1994 to 1998, and Treasurer and Vice President—Finance of Continental Bank Corporation, a financial institution, from 1986 to 1994.

Gail G. Snyder has been Senior Vice President—Chief Investment Officer of NFS and several other Nationwide companies since January 2006. She was previously Senior Vice President—Enterprise Portfolio and Strategy Management of NMIC and several other Nationwide companies from January 2005 to January 2006. Previously, she served as Senior Vice President—Portfolio Management of Genworth Financial, Inc., an insurance and financial services company, from May 2004 to December 2004. From March 1995 to May 2005, she served in various capacities at divisions of General Electric, including Senior Vice President—Insurance-Strategic Client Solutions of GE Asset Management, a financial services firm; Chief Investment Officer of GE Mortgage Insurance, a mortgage services firm; and Vice President of First Colony Life Insurance Company, an insurance services company acquired by General Electric. She also held various investment positions at Provident Life and Accident Insurance Company, an insurance services company, from December 1986 to March 1995.

The Board of Directors adopted the Nationwide Code of Conduct and Business Practices (Code) which is posted on the Company’s web site (http://www.nationwidefinancial.com) under the Corporate Governance subsection of the Investor Relations area of the web site. The Code is available in print, free of charge, to any shareholder who requests it. Requests for copies should be made to Mark Barnett, Vice President—Investor Relations, One Nationwide Plaza, Columbus, Ohio, 43215, or via telephone at 614-249-8437. All directors, officers and employees of the Nationwide group of companies are required to adhere to the Code. As required by SEC regulations and the listing standards of the New York Stock Exchange, the Code contains written standards designed to deter wrongdoing and to promote honest, ethical conduct including ethical handling of conflicts; full, fair, accurate, timely and understandable disclosure in regulatory reports and public communications; compliance with laws, rules and regulations; prompt internal reporting of violations of the Code; and accountability for adherence to the Code. It also contains compliance standards and procedures that facilitate the effective operation of the Code. Any waivers from, or amendments to, the Code for directors and executive officers must be approved by the Board of Directors or a designated board committee and will be promptly disclosed to the shareholders by posting any waiver on the NFS web site listed above.

ITEM 11    EXECUTIVE COMPENSATION

Information required by this item is set forth under the captions “Director Compensation” and “Executive Compensation” in the NFS 2007 Proxy Statement and is incorporated herein by reference.

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ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required by this item is set forth under the caption “Beneficial Ownership of Common Stock” in the NFS 2007 Proxy Statement and is incorporated herein by reference.

NFS maintains two equity compensation plans, the Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (LTEP) and the Amended and Restated Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee Directors (Stock Retainer Plan). The following table provides information about equity awards under these plans as of December 31, 2006:

Plan category	(a) Number of Class A Common Shares to be issued upon exercise of outstanding options, warrants and rights	(b) Weighted average exercise price of outstanding options, warrants and rights		(c) Number of Class A Common Shares remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by shareholders1	5,975,143	$	36.88	9,072,111	2
Equity compensation plans not approved by shareholders	N/A		N/A	N/A
Total	5,975,143	$	36.88	9,072,111

¹ Consists of the LTEP and the Stock Retainer Plan. NFS does not maintain any equity compensation plan not approved by shareholders.

² Securities remaining available for issuance under the LTEP and the Stock Retainer Plan, of which 19,292 shares are available for issuance under the Stock Retainer Plan. For the LTEP, in addition to being available for issuance upon exercise of options and stock appreciation rights, 9,052,819 shares may be issued in connection with restricted stock, performance shares, performance units and stock-based Nationwide value added awards.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by this item is set forth under the captions “Certain Relationships and Related Transactions” and “The Board of Directors and its Committees—Additional Governance Policies—Independence Standards for Directors” in the NFS 2007 Proxy Statement and is incorporated herein by reference.

ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES

Information required by this item is set forth under the caption “Proposal 2—Ratification of the Appointment of Independent Registered Public Accounting Firm—Principal Accounting Fees and Services” in the NFS 2007 Proxy Statement and is incorporated herein by reference.

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PART IV

ITEM 15    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

	Page
Consolidated Financial Statements
Report of Management	F-1
Report of Independent Registered Public Accounting Firm	F-2
Report of Independent Registered Public Accounting Firm	F-3
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004	F-4
Consolidated Balance Sheets as of December 31, 2006 and 2005	F-5
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2006, 2005 and 2004	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004	F-7
Notes to Consolidated Financial Statements	F-8
Financial Statement Schedules
Schedule I—ConsolidatedSummary of Investments—Other Than Investments in Related Parties as of December 31, 2006	F-70
Schedule II—CondensedFinancial Information of Registrant	F-71
Schedule III—SupplementaryInsurance Information as of December 31, 2006, 2005 and 2004 and for the years then ended	F-74
Schedule IV—Reinsuranceas of December 31, 2006, 2005 and 2004 and for the years then ended	F-75
Schedule V—Valuation and Qualifying Accounts for the years ended December 31, 2006, 2005 and 2004	F-76
Exhibits	F-78

All other schedules are omitted because they are not applicable or not required, or because the required information has been included in the audited consolidated financial statements or notes thereto.

87

Report of Management

The management of Nationwide Financial Services, Inc. and its subsidiaries (the Company) is responsible for the preparation and integrity of the consolidated financial statements and other financial information contained in this Annual Report on Form 10-K. The consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles, and where necessary, include amounts that are based on the best estimates and judgment of management. Management believes the consolidated financial statements present fairly the Company’s financial position and results of operations and that other financial data contained in the Annual Report on Form 10-K has been compiled in a manner consistent with the consolidated financial statements.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control system was designed to provide reasonable assurance to management and our Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the preparation and presentation of financial statements.

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, our management used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on those criteria, our management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006.

Our independent registered public accounting firm, KPMG LLP, performed audits of the Company’s consolidated financial statements and internal control over financial reporting. Management has made available to KPMG LLP all of the Company’s financial records and related data.

Management also recognizes its responsibility for fostering a strong ethical business environment that ensures the Company’s affairs are conducted according to the highest standards of professional conduct, honesty and integrity. The Company’s Code of Conduct and Business Practices (Code), which is posted on the Company’s web site, reflects this responsibility. The Code addresses the necessity of ensuring open communication within the Company; potential conflicts of interest; marketing practices; compliance with all laws, including those relating to financial disclosure; and the confidentiality of proprietary information. The Company’s Office of Ethics and Business Practices is responsible for raising employee awareness of the Company’s Code and serves as a confidential resource for inquiries and reporting.

The Audit Committee of the Board of Directors of the Company, composed of independent directors pursuant to the New York Stock Exchange listing standards and rules of the Securities and Exchange Commission, meets periodically with the external and internal auditors, jointly and separately, to evaluate the effectiveness of work performed by them in discharging their respective responsibilities and to assure their independence and free access to the Audit Committee.

/s/ Mark R. Thresher
Name:	Mark R. Thresher
Title:	President and Chief Operating Officer

March 1, 2007

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Nationwide Financial Services, Inc.:

We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting contained in Item 9A, Controls and Procedures, of Nationwide Financial Services, Inc. and subsidiaries’ (the Company) 2006 Annual Report on Form 10-K, that the Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Nationwide Financial Services, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Nationwide Financial Services, Inc. and subsidiaries as listed in the accompanying index, and our report dated March 1, 2007 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Columbus, Ohio

March 1, 2007

F-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Nationwide Financial Services, Inc.:

We have audited the consolidated financial statements of Nationwide Financial Services, Inc. and subsidiaries (the Company) as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nationwide Financial Services, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Nationwide Financial Services, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

As discussed in Note 3 to the consolidated financial statements, the Company adopted the American Institute of Certified Public Accountants’ Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts, in 2004.

/s/ KPMG LLP

Columbus, Ohio

March 1, 2007

F-3

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(in millions, except per share amounts)

	Years ended December 31,
	2006		2005			2004
Revenues:
Policy charges	$	1,316.0	$	1,241.5		$	1,222.6
Traditional life insurance and immediate annuity premiums		441.5		399.9			402.7
Net investment income		2,298.5		2,343.9			2,231.7
Net realized gains (losses) on investments, hedging instruments and hedged items		9.1		20.8			(32.2	)
Other income		350.4		301.8			251.3
Total revenues		4,415.5		4,307.9			4,076.1
Benefits and expenses:
Interest credited to policyholder account values		1,380.3		1,380.9			1,328.3
Life insurance and annuity benefits		646.8		574.9			548.6
Policyholder dividends on participating policies		90.7		107.3			101.4
Amortization of deferred policy acquisition costs		462.9		480.2			430.4
Amortization of value of business acquired		46.0		45.0			52.3
Interest expense on debt		103.7		108.0			102.4
Debt extinguishment costs		—		21.7			—
Other operating expenses		906.2		833.8			837.6
Total benefits and expenses		3,636.6		3,551.8			3,401.0
Income from continuing operations before federal income tax expense		778.9		756.1			675.1
Federal income tax expense		65.1		132.7			167.4
Income from continuing operations		713.8		623.4			507.7
Discontinued operations, net of taxes		—		(24.7	)		(2.3	)
Cumulative effect of adoption of accounting principle, net of taxes		—		—			(3.4	)
Net income	$	713.8	$	598.7		$	502.0
Earnings from continuing operations per common share:
Basic	$	4.76	$	4.08		$	3.34
Diluted	$	4.74	$	4.06		$	3.32
Earnings per common share:
Basic	$	4.76	$	3.92		$	3.30
Diluted	$	4.74	$	3.90		$	3.28
Weighted average common shares outstanding:
Basic		149.9		152.9			152.1
Diluted		150.7		153.6			152.9
Cash dividends declared per common share	$	0.92	$	0.76		$	0.72

See accompanying notes to consolidated financial statements.

F-4

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in millions, except per share amounts)

	December 31,
	2006			2005
Assets
Investments:
Securities available-for-sale, at fair value:
Fixed maturity securities (cost $28,067.2 in 2006; $29,830.8 in 2005)	$	28,160.0		$	30,106.0
Equity securities (cost $57.2 in 2006; $64.8 in 2005)		67.6			75.6
Trading assets, at fair value		24.3			34.4
Mortgage loans on real estate, net		8,909.8			9,148.6
Real estate, net		76.7			108.7
Policy loans		966.9			930.6
Other long-term investments		780.1			691.9
Short-term investments, including amounts managed by a related party		2,215.6			2,073.2
Total investments		41,201.0			43,169.0
Cash		20.2			16.4
Accrued investment income		373.8			396.3
Deferred policy acquisition costs		3,851.0			3,685.4
Value of business acquired		392.7			449.7
Goodwill		359.0			364.5
Other assets		2,519.2			2,114.8
Assets held in separate accounts		70,694.7			65,963.8
Total assets	$	119,411.6		$	116,159.9
Liabilities and Shareholders’ Equity
Liabilities:
Future policy benefits and claims	$	38,097.8		$	39,748.1
Short-term debt		85.2			252.3
Long-term debt		1,398.5			1,398.0
Other liabilities		3,597.1			3,447.3
Liabilities related to separate accounts		70,694.7			65,963.8
Total liabilities		113,873.3			110,809.5
Shareholders’ equity:
Preferred stock, $0.01 par value; authorized—50.0 shares; issued and outstanding—none		—			—
Class A common stock, $0.01 par value; authorized—750.0 shares; issued—69.7 and 67.5 shares in 2006 and 2005, respectively; outstanding—54.2 and 56.9 shares in 2006 and 2005, respectively		0.7			0.7
Class B common stock, $0.01 par value; authorized—750.0 shares; issued and outstanding—91.8 and 95.6 shares in 2006 and 2005, respectively		1.0			1.0
Additional paid-in capital		1,762.3			1,670.8
Retained earnings		4,460.3			3,883.1
Accumulated other comprehensive income		31.9			100.7
Treasury stock		(716.3	)		(304.2	)
Other, net		(1.6	)		(1.7	)
Total shareholders’ equity		5,538.3			5,350.4
Total liabilities and shareholders’ equity	$	119,411.6		$	116,159.9

See accompanying notes to consolidated financial statements.

F-5

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(in millions)

	Class A common stock		Class B common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income			Treasury stock			Other, net			Total shareholders’ equity
Balance as of December 31, 2003	$	0.6	$	1.0	$	1,614.3		$	3,006.4		$	504.9		$	(247.6	)	$	(4.2	)	$	4,875.4
Comprehensive income:
Net income		—		—		—			502.0			—			—			—			502.0
Other comprehensive loss, net of taxes		—		—		—			—			(72.7	)		—			—			(72.7	)
Total comprehensive income																					429.3
Cash dividends declared		—		—		—			(108.4	)		—			—			—			(108.4	)
Stock options exercised		—		—		20.2			—			—			—			—			20.2
Other, net		0.1		—		0.1			—			—			(3.8	)		2.2			(1.4	)
Balance as of December 31, 2004		0.7		1.0		1,634.6			3,400.0			432.2			(251.4	)		(2.0	)		5,215.1
Comprehensive income:
Net income		—		—		—			598.7			—			—			—			598.7
Other comprehensive loss, net of taxes		—		—		—			—			(331.5	)		—			—			(331.5	)
Total comprehensive income																					267.2
Cash dividends declared		—		—		—			(116.2	)		—			—			—			(116.2	)
Common shares repurchased under announced program		—		—		—			—			—			(51.4	)		—			(51.4	)
Stock options exercised		—		—		39.4			—			—			—			—			39.4
Other, net		—		—		(3.2	)		0.6			—			(1.4	)		0.3			(3.7	)
Balance as of December 31, 2005		0.7		1.0		1,670.8			3,883.1			100.7			(304.2	)		(1.7	)		5,350.4
Comprehensive income:
Net income		—		—		—			713.8			—			—			—			713.8
Other comprehensive loss, net of taxes		—		—		—			—			(68.8	)		—			—			(68.8	)
Total comprehensive income																					645.0
Cash dividends declared		—		—		—			(136.6	)		—			—			—			(136.6	)
Common shares repurchased under announced program		—		—		(4.8	)		—			—			(412.0	)		—			(416.8	)
Stock options exercised		—		—		87.6			—			—			—			—			87.6
Other, net		—		—		8.7			—			—			(0.1	)		0.1			8.7
Balance as of December 31, 2006	$	0.7	$	1.0	$	1,762.3		$	4,460.3		$	31.9		$	(716.3	)	$	(1.6	)	$	5,538.3

See accompanying notes to consolidated financial statements.

F-6

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in millions)

	Years ended December 31,
	2006			2005			2004
Cash flows from operating activities:
Net income	$	713.8		$	598.7		$	502.0
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses on investments, hedging instruments and hedged items		(9.1	)		(20.8	)		32.2
Interest credited to policyholder account values		1,380.3			1,380.9			1,328.3
Capitalization of deferred policy acquisition costs		(588.4	)		(489.0	)		(539.2	)
Amortization of deferred policy acquisition costs		462.9			480.2			430.4
Amortization and depreciation, excluding debt extinguishment costs		112.7			142.9			167.3
Debt extinguishment costs (non-cash)		—			21.7			—
(Increase) decrease in other assets		(399.9	)		621.6			(331.5	)
Increase (decrease) in policy and other liabilities		762.7			(777.7	)		462.3
Other, net		4.8			(4.4	)		35.2
Net cash provided by operating activities		2,439.8			1,954.1			2,087.0
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale		5,579.4			5,555.0			3,888.4
Proceeds from sale of securities available-for-sale		2,645.0			3,480.5			3,767.2
Proceeds from repayments or sales of mortgage loans on real estate		2,549.4			2,962.9			2,083.2
Cost of securities available-for-sale acquired		(6,489.3	)		(8,295.6	)		(8,368.8	)
Cost of mortgage loans on real estate originated or acquired		(2,319.2	)		(2,716.0	)		(2,348.4	)
Net increase in short-term investments		(142.4	)		(55.6	)		(48.7	)
Collateral (paid) received—securities lending, net		(314.6	)		36.6			89.4
Acquisition of subsidiary, net of cash acquired		—			(18.0	)		—
Other, net		(81.0	)		135.4			(356.5	)
Net cash provided by (used in) investing activities		1,427.3			1,085.2			(1,294.2	)
Cash flows from financing activities:
Net (decrease) increase in short-term debt		(167.1	)		21.5			25.5
Net proceeds from issuance of long-term debt		—			199.4			—
Principal payments on long-term debt		—			(206.2	)		—
Cash dividends paid		(132.7	)		(114.8	)		(101.9	)
Investment and universal life insurance product deposits		3,781.7			3,956.1			4,399.1
Investment and universal life insurance product withdrawals		(7,024.6	)		(6,914.0	)		(5,091.3	)
Common shares repurchased under announced program		(416.8	)		(49.0	)		—
Other, net		96.2			31.7			16.7
Net cash used in financing activities		(3,863.3	)		(3,075.3	)		(751.9	)
Net increase (decrease) in cash		3.8			(36.0	)		40.9
Cash, beginning of period		16.4			52.4			11.5
Cash, end of period	$	20.2		$	16.4		$	52.4

See accompanying notes to consolidated financial statements.

F-7

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, 2005 and 2004

(1) Nature of Operations

Nationwide Financial Services, Inc. (NFS, or collectively with its subsidiaries, the Company) was formed in November 1996. NFS is the holding company for Nationwide Life Insurance Company (NLIC) and other companies that comprise the domestic life insurance and retirement savings operations of the Nationwide group of companies (Nationwide). This group includes Nationwide Financial Network (NFN), which refers to Nationwide Life Insurance Company of America (NLICA) and its subsidiaries, including the affiliated distribution network. NFS is incorporated in Delaware and maintains its principal executive offices in Columbus, Ohio.

The Company is a leading provider of long-term savings and retirement products in the United States of America (U.S.). The Company develops and sells a diverse range of products including individual annuities, private and public sector group retirement plans, other investment products sold to institutions, life insurance and advisory services.

The Company sells its products through a diverse distribution network. Unaffiliated entities that sell the Company’s products to their own customer bases include independent broker/dealers, financial institutions, wirehouse and regional firms, pension plan administrators, and life insurance specialists. Representatives of the Company who market products directly to a customer base include Nationwide Retirement Solutions, Inc. (NRS), an indirect wholly-owned subsidiary; NFN producers; The 401(k) Company, an indirect wholly-owned subsidiary (see Note 2(n) for information about the pending sale of The 401(k) Company); and TBG Insurance Services Corporation d/b/a TBG Financial (TBG Financial), a majority-owned subsidiary, through its joint venture with MC Insurance Agency Services, LLC d/b/a Mullin Consulting (Mullin Consulting). The Company also distributes retirement savings products through the agency distribution force of its ultimate majority parent company, Nationwide Mutual Insurance Company (NMIC).

As of December 31, 2006 and 2005, the Company did not have a significant concentration of financial instruments in a single investee, industry or geographic region of the U.S. Also, the Company did not have a concentration of business transactions with a particular customer, lender, distribution source, market or geographic region of the U.S. in which business is conducted that makes it overly vulnerable to a single event which could cause a severe impact to the Company’s financial position.

The 54.2 million shares of Class A common stock outstanding as of December 31, 2006 are publicly held and primarily were issued through NFS’ initial public offering completed in March 1997 and in conjunction with the acquisition of NFN in October 2002. The Class A shares represent 37.1% of the equity ownership in NFS and 5.6% of the combined voting power of NFS’ Class A and Class B common stock as of December 31, 2006. Nationwide Corporation (Nationwide Corp.) owns all of the outstanding shares of Class B common stock, which represents the remaining 62.9% equity ownership and 94.4% of the combined voting power of the shareholders of NFS as of December 31, 2006. Nationwide Corp. is a majority-owned subsidiary of NMIC.

(2) Summary of Significant Accounting Policies

The significant accounting policies followed by the Company that materially affect financial reporting are summarized below. The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP).

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ significantly from those estimates.

F-8

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The Company’s most significant estimates include those used to determine the following: the balance, recoverability and amortization of deferred policy acquisition costs (DAC) for investment and universal life insurance products; impairment losses on investments; valuation allowances for mortgage loans on real estate; the liability for future policy benefits and claims; and federal income tax provision. Although some variability is inherent in these estimates, the recorded amounts reflect management’s best estimates based on facts and circumstances as of the balance sheet date. Management believes the amounts provided are appropriate.

(a) Consolidation Policy

The consolidated financial statements include the accounts of NFS and companies in which NFS directly or indirectly has a controlling financial interest. Minority interest expense is included in other operating expenses in the consolidated statements of income, and minority interest is included in other liabilities on the consolidated balance sheets. All significant intercompany balances and transactions have been eliminated.

(b) Valuation of Investments, Investment Income and Related Gains and Losses

The Company is required to classify its fixed maturity securities and marketable equity securities as held-to-maturity, available-for-sale or trading. Trading assets may include any combination of fixed maturity securities and marketable equity securities. Trading assets are stated at fair value, with changes in fair value recorded as a component of net realized gains on investments. All other fixed maturity and marketable equity securities are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of adjustments to DAC, value of business acquired (VOBA), future policy benefits and claims, policyholder dividend obligation and deferred federal income taxes reported as a separate component of accumulated other comprehensive income (AOCI) in shareholders’ equity. The adjustments to DAC and VOBA represent the changes in amortization of DAC and VOBA that would have been required as a charge or credit to operations had such unrealized amounts been realized and allocated to the product lines. The adjustment to future policy benefits and claims represents the increase in policy reserves from using a discount rate that would have been required had such unrealized amounts been realized and the proceeds reinvested at then current market interest rates, which were lower than the then current effective portfolio rate.

The fair value of fixed maturity and marketable equity securities is generally obtained from independent pricing services based on market quotations. For fixed maturity securities not priced by independent services (generally private placement securities and securities that do not trade regularly), an internally developed pricing model or “corporate pricing matrix” is most often used. The corporate pricing matrix is developed by obtaining spreads versus the U.S. Treasury yield for corporate securities with varying weighted average lives and bond ratings. The weighted average life and bond rating of a particular fixed maturity security to be priced using the corporate matrix are important inputs into the model and are used to determine a corresponding spread that is added to the U.S. Treasury yield to create an estimated market yield for that bond. The estimated market yield and other relevant factors are then used to estimate the fair value of the particular fixed maturity security. Additionally, for valuing certain fixed maturity securities with complex cash flows such as certain mortgage-backed and asset-backed securities, a “structured product model” is used. The structured product model uses third party pricing tools. For securities for which quoted market prices are not available and for which the Company’s structured product model is not suitable for estimating fair values, fair values are determined using other modeling techniques, primarily a commercial software application utilized in valuing complex securitized investments with variable cash flows. As of December 31, 2006, 72% of the fair values of fixed maturity securities were obtained from independent pricing services, 19% from the Company’s pricing matrices and 9% from other sources, compared to 73%, 20% and 7%, respectively, as of December 31, 2005.

F-9

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

Management regularly reviews each investment in its fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.

Under the Company’s accounting policy for equity securities and debt securities that can be contractually prepaid or otherwise settled in a way that may limit the Company’s ability to fully recover cost, an impairment is deemed to be other-than-temporary unless the Company has both the ability and intent to hold the investment until the security’s forecasted recovery and evidence exists indicating that recovery will occur in a reasonable period of time. Also, for such debt securities management estimates cash flows over the life of purchased beneficial interests in securitized financial assets. If management estimates that the fair value of its beneficial interest is not greater than or equal to its carrying value based on current information and events, and if there has been an adverse change in estimated cash flows since the last revised estimate (considering both timing and amount), then the Company recognizes an other-than-temporary impairment and writes down the purchased beneficial interest to fair value.

For other debt securities, an other-than-temporary impairment charge is taken when the Company does not have the ability and intent to hold the security until the forecasted recovery or if it is no longer probable that the Company will recover all amounts due under the contractual terms of the security. Many criteria are considered during this process including, but not limited to, the current fair value as compared to cost or amortized cost, as appropriate, of the security; the amount and length of time a security’s fair value has been below cost or amortized cost; specific credit issues and financial prospects related to the issuer; management’s intent to hold or dispose of the security; and current economic conditions.

Other-than-temporary impairment losses result in a permanent reduction to the cost basis of the underlying investment.

For mortgage-backed securities, the Company recognizes income using a constant effective yield method based on prepayment assumptions and the estimated economic life of the securities. When estimated prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. Any resulting adjustment is included in net investment income. All other investment income is recorded using the interest-method without anticipating the impact of prepayments.

The Company provides valuation allowances for impairments of mortgage loans on real estate based on a review by portfolio managers. Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When management determines that a loan is impaired, a provision for loss is established equal to the difference between the carrying value and the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral, if the loan is collateral dependent. In addition to the valuation allowance on specific loans, the Company maintains an unallocated allowance for probable losses inherent in the loan portfolio as of the balance sheet date, but not yet specifically identified by loan. Changes in the valuation allowance are recorded in net realized gains and losses on investments, hedging instruments and hedged items. Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans on real estate is included in net investment income in the period received.

The valuation allowance account for mortgage loans on real estate is maintained at a level believed adequate by management and reflects management’s best estimate of probable credit losses, including losses incurred at

F-10

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

the balance sheet date but not yet identified by specific loan. Management’s periodic evaluation of the adequacy of the allowance for losses is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors.

The Company grants mainly commercial mortgage loans on real estate to customers throughout the U.S. As of December 31, 2006, the Company had a diversified portfolio with carrying values of no more than 25.2% of the mortgage loan portfolio in any geographic region of the U.S. and no more than 3.3% with any one borrower, compared to 23.6% and 1.8%, respectively, as of December 31, 2005. As of December 31, 2006 and 2005, 33.5% and 32.0% of the carrying value of the Company’s commercial mortgage loan portfolio financed retail properties, respectively.

Real estate to be held and used is carried at cost less accumulated depreciation. Real estate designated as held for disposal is not depreciated and is carried at the lower of the carrying value at the time of such designation or fair value less cost to sell. Other long-term investments are carried on the equity method of accounting.

Impairment losses are recorded on investments in long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts.

Realized gains and losses on the sale of investments are determined on the basis of specific security identification. Changes in the Company’s mortgage loan valuation allowance and recognition of impairment losses for other-than-temporary declines in the fair values of applicable investments are included in realized gains and losses on investments, hedging instruments and hedged items.

(c) Derivative Instruments

Derivatives are carried at fair value. On the date a derivative contract is entered into, the Company designates the derivative as a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge); a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge); a foreign currency fair value or cash flow hedge (foreign currency hedge); or a non-hedge transaction. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for entering into various hedge transactions. This process includes linking all derivatives that are designated as fair value, cash flow or foreign currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used for hedging transactions are expected to be and, for ongoing hedging relationships, have been highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not, or is not expected to be, highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.

The Company enters into interest rate swaps, cross-currency swaps or Euro futures to hedge the fair value of existing fixed rate assets and liabilities. In addition, the Company uses short U.S. Treasury future positions to hedge the fair value of bond and mortgage loan commitments. Typically, the Company is hedging the risk of changes in fair value attributable to changes in benchmark interest rates. Derivative instruments classified as fair value hedges are carried at fair value, with changes in fair value recorded in realized gains and losses on

F-11

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

investments, hedging instruments and hedged items. Changes in the fair value of the hedged item that are attributable to the risk being hedged are also recorded in realized gains and losses on investments, hedging instruments and hedged items.

The Company may enter into “receive fixed/pay variable” interest rate swaps to hedge existing variable rate assets or to hedge cash flows from the anticipated purchase of investments. These derivative instruments are identified as cash flow hedges and are carried at fair value with the offset recorded in AOCI to the extent the hedging relationship is effective. The ineffective portion of the hedging relationship is recorded in realized gains and losses on investments, hedging instruments and hedged items. Gains and losses on derivative instruments that are initially recorded in AOCI are reclassified out of AOCI and recognized in earnings over the same period(s) that the hedged item affects earnings.

Accrued interest receivable or payable under interest rate and foreign currency swaps are recognized as an adjustment to net investment income or interest credited to policyholder account values consistent with the nature of the hedged item, except for interest rate swaps hedging the anticipated sale of investments where amounts receivable or payable under the swaps are recorded as realized gains and losses on investments, hedging instruments and hedged items, and except for interest rate swaps hedging the anticipated purchase of investments where amounts receivable or payable under the swaps are initially recorded in AOCI to the extent the hedging relationship is effective.

The Company periodically may enter into a derivative transaction that will not qualify for hedge accounting. The Company does not enter into speculative positions. Although these transactions do not qualify for hedge accounting, or have not been designated in hedging relationships by the Company, they are part of its overall risk management strategy. For example, the Company may sell credit default protection through a credit default swap. Although the credit default swap may not be effective in hedging specific investments, the income stream allows the Company to manage overall investment yields while exposing the Company to acceptable credit risk. The Company may enter into a cross-currency basis swap (pay a variable U.S. rate and receive a variable foreign-denominated rate) to eliminate the foreign currency exposure of a variable rate foreign-denominated liability. Although basis swaps may qualify for hedge accounting, the Company has chosen not to designate these derivatives as hedging instruments due to the difficulty in assessing and monitoring effectiveness for both sides of the basis swap. Derivative instruments that do not qualify for hedge accounting or are not designated as hedging instruments are carried at fair value, with changes in fair value recorded in realized gains and losses on investments, hedging instruments and hedged items.

(d) Revenues and Benefits

Investment and Universal Life Insurance Products: Investment products consist primarily of individual and group variable and fixed deferred annuities. Universal life insurance products include universal life insurance, variable universal life insurance, corporate-owned life insurance (COLI), bank-owned life insurance (BOLI) and other interest-sensitive life insurance policies. Revenues for investment products and universal life insurance products consist of net investment income, asset fees, cost of insurance charges, administrative fees and surrender charges that have been earned and assessed against policy account balances during the period. The timing of revenue recognition as it relates to fees assessed on investment contracts and universal life contracts is determined based on the nature of such fees. Asset fees, cost of insurance charges and administrative fees are assessed on a daily or monthly basis and recognized as revenue when assessed and earned. Certain amounts assessed that represent compensation for services to be provided in future periods are reported as unearned revenue and recognized in income over the periods benefited. Surrender charges are recognized upon surrender

F-12

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

of a contract in accordance with contractual terms. Policy benefits and claims that are charged to expense include interest credited to policy account values and benefits and claims incurred in the period in excess of related policy account values.

Traditional Life Insurance Products: Traditional life insurance products include those products with fixed and guaranteed premiums and benefits and primarily consist of whole life insurance, limited-payment life insurance, term life insurance and certain annuities with life contingencies. Premiums for traditional life insurance products are recognized as revenue when due. Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the contract. This association is accomplished through the provision for future policy benefits and the deferral and amortization of policy acquisition costs.

(e) Deferred Policy Acquisition Costs for Investment and Universal Life Insurance Products

The Company has deferred certain costs of acquiring investment and universal life insurance products business, principally commissions, certain expenses of the policy issue and underwriting department, and certain variable sales expenses that relate to and vary with the production of new and renewal business. Investment products primarily consist of individual and group variable and fixed deferred annuities. Universal life insurance products include universal life insurance, variable universal life insurance, COLI and other interest-sensitive life insurance policies. DAC is subject to recoverability testing in the year of policy issuance and loss recognition testing at the end of each reporting period.

For investment and universal life insurance products, DAC is being amortized with interest over the lives of the policies in relation to the present value of estimated gross profits from projected interest margins, asset fees, cost of insurance charges, administration fees, surrender charges, and net realized gains and losses less policy benefits and policy maintenance expenses. The DAC asset related to investment products and universal life insurance products is adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale, as described in Note 2(b).

The most significant assumptions that are involved in the estimation of future gross profits include future net separate account performance, surrender/lapse rates, interest margins and mortality. The Company’s long-term assumption for net separate account performance is currently 8% growth per year. If actual net separate account performance varies from the 8% assumption, the Company assumes different performance levels over the next three years such that the mean return equals the long-term assumption. This process is referred to as a reversion to the mean. The assumed net separate account return assumptions used in the DAC models are intended to reflect what is anticipated. However, based on historical returns of the Standard & Poor’s (S&P) 500 Index, and as part of its pre-set parameters, the Company’s reversion to the mean process generally limits returns to 0-15% during the three-year reversion period.

Changes in assumptions can have a significant impact on the amount of DAC reported for investment products and universal life insurance products and their related amortization patterns. In the event actual experience differs from assumptions or future assumptions are revised, the Company is required to record an increase or decrease in DAC amortization expense, which could be significant. In general, increases in the estimated general and separate account returns result in increased expected future profitability and may lower the rate of DAC amortization, while increases in lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.

Management evaluates the appropriateness of the individual variable annuity DAC balance within pre-set parameters. These parameters are designed to appropriately reflect the Company’s long-term expectations with

F-13

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

respect to individual variable annuity contracts while also evaluating the potential impact of short-term experience on the Company’s recorded individual variable annuity DAC balance. If the recorded balance of individual variable annuity DAC falls outside of these parameters for a prescribed period of time, or if the recorded balance falls outside of these parameters and management determines it is not reasonably possible to get back within the parameters during this period of time, assumptions are required to be unlocked and DAC is recalculated using revised best estimate assumptions. If DAC assumptions were unlocked and revised, the Company would continue to use the reversion to the mean process.

For other investment and universal life insurance products, DAC is adjusted each quarter to reflect revised best estimate assumptions, including the use of a reversion to the mean methodology over the next three years as it relates to net separate account performance. Any resulting DAC true-up and unlocking adjustments are reflected currently in the consolidated statements of income.

(f) Value of Business Acquired and Other Intangible Assets

As a result of the acquisition of NFN in 2002 and the application of purchase accounting, the Company reports an intangible asset representing the estimated fair value of the business in force and the portion of the purchase price that was allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts existing as of the closing date of the NFN acquisition. The value assigned to VOBA was supported by an independent valuation study commissioned by the Company and executed by a team of qualified valuation experts, including actuarial consultants. The expected future cash flows used in determining such value were based on actuarially determined projections by major lines of business of future policy and contract charges, premiums, mortality and morbidity, separate account performance, surrenders, changes in reserves, operating expenses, investment income and other factors. These projections considered all known or expected factors at the valuation date based on the judgment of management. The actual experience on purchased business, to some extent, has and may continue to vary from projections due to differences in renewal premiums, investment spreads, investment gains and losses, mortality and morbidity costs, or other factors.

Amortization of VOBA occurs with interest over the anticipated lives of the major lines of business to which it relates (initially ranging from 13 to 30 years) in relation to estimated gross profits, gross margins or premiums, as appropriate. If estimated gross profits, gross margins or premiums differ from expectations, the amortization of VOBA is adjusted on a retrospective or prospective basis, as appropriate. The VOBA asset related to investment products and universal life insurance products is adjusted annually for the impact of net unrealized gains and losses on securities available-for-sale had such gains and losses been realized and allocated to the product lines, as described in Note 2(b). The recoverability of VOBA is evaluated annually. If the evaluation indicates that the existing insurance liabilities, together with the present value of future net cash flows from the blocks of business acquired, is insufficient to recover VOBA, the difference, if any, is charged to expense as accelerated amortization of VOBA.

For those products amortized in relation to estimated gross profits, the most significant assumptions involved in the estimation of future gross profits include future net separate account performance, surrender/lapse rates, interest margins and mortality. The Company’s long-term assumption for net separate account performance is currently 8%. If actual net separate account performance varies from the 8% assumption, the Company assumes different performance levels over the next three years such that the mean return equals the long-term assumption. The assumed net separate account return assumptions used in the VOBA models are intended to reflect what is anticipated. However, based on historical returns of the S&P 500 Index, the Company’s reversion to the mean process generally limits returns to 0-15% during the three-year reversion period.

F-14

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

Changes in assumptions can have a significant impact on the amount of VOBA reported for all products and their related amortization patterns. In the event actual experience differs from assumptions or assumptions are revised, the Company is required to record an increase or decrease in VOBA amortization expense (VOBA unlocking), which could be significant. In general, increases in the estimated general and separate account returns result in increased expected future profitability and may lower the rate of VOBA amortization, while increases in lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of VOBA amortization.

The use of discount rates was necessary to establish fair values of VOBA and other intangible assets acquired in the NFN transaction. In selecting the appropriate discount rates, management considered its weighted average cost of capital as well as the weighted average cost of capital required by market participants. In addition, consideration was given to the perceived risk of the assets acquired, which includes the expected growth and competitive profile of the life insurance market and the nature of the assumptions used in the valuation process. An after-tax discount rate of 11.0% was used to value VOBA, while after-tax discount rates ranging from 11.0% to 12.5% were used to value the other intangible assets acquired in the NFN transaction, as well as for net realized gains and losses, net of taxes, allocated to the closed block.

Intangible assets include NFN’s career agency force, independent agency force, retirement services distribution channel, state licenses and certain other contracts and relationships. These intangible assets have been assigned values using various methodologies, including present value of projected future cash flows, analysis of similar transactions that have occurred or could be expected to occur in the market, and replacement or reproduction cost. Other factors considered in the valuation include the relative risk profile of each asset, the deterioration of the economic life, and the enhancement to other associated assets. The initial valuations of these intangible assets were also supported by an independent valuation study that was commissioned by the Company and executed by qualified valuation experts.

The other identified intangible assets with finite lives are amortized over their estimated useful lives, which initially ranged from 5 to 22 years (weighted average 19 years), primarily based on the cash flows generated by these assets.

(g) Goodwill

In connection with acquisitions of operating entities, the Company recognizes the excess of the purchase price over the fair value of net assets acquired as goodwill. Goodwill is not amortized, but is evaluated for impairment at the reporting unit level annually in the third quarter. Goodwill of a reporting unit also is tested for impairment on an interim basis in addition to the annual evaluation if an event occurs or circumstances change which would more likely than not reduce the fair value of a reporting unit below its carrying amount.

The process of evaluating goodwill for impairment requires several judgments and assumptions to be made to determine the fair value of the reporting units, including the method used to determine fair value; discount rates; expected levels of cash flows, revenues and earnings; and the selection of comparable companies used to develop market-based assumptions.

During the quarter ended September 30, 2006, the Company changed the timing of its annual goodwill impairment testing from the fourth quarter (based on September 30 financial information) to the third quarter (based on June 30 financial information). This change allows the Company to complete its annual goodwill impairment testing prior to its year-end closing activities for the current year and annual financial planning for

F-15

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

the subsequent year. In addition, this change did not delay, accelerate or avoid an impairment charge. Accordingly, management believes that the accounting change described above is preferable under the circumstances.

(h) Closed Block

In connection with the sponsored demutualization of Provident Mutual Life Insurance Company (Provident) prior to its acquisition by the Company, Provident established a closed block for the benefit of certain classes of individual participating policies that had a dividend scale payable in 2001. Assets were allocated to the closed block in an amount that produces cash flows which, together with anticipated revenues from closed block business, is reasonably expected to be sufficient to provide for (1) payment of policy benefits, specified expenses and taxes, and (2) the continuation of dividends throughout the life of the Provident policies included in the closed block based upon the dividend scales payable for 2001, if the experience underlying such dividend scales continues.

Assets allocated to the closed block inure solely to the benefit of the holders of the policies included in the closed block and will not revert to the benefit of the Company. No reallocation, transfer, borrowing or lending of assets can be made between the closed block and other portions of the Company’s general account, any of its separate accounts, or any affiliate of the Company without the approval of the Pennsylvania Insurance Department (PID). The closed block will remain in effect as long as any policy in the closed block is in force.

If, over time, the aggregate performance of the closed block assets and policies is better than was assumed in funding the closed block, dividends to policyholders will be increased. If, over time, the aggregate performance of the closed block assets and policies is less favorable than was assumed in the funding, dividends to policyholders could be reduced. If the closed block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from the Company’s assets outside of the closed block.

The assets and liabilities allocated to the closed block are recorded in the Company’s consolidated financial statements on the same basis as other similar assets and liabilities. The carrying amount of closed block liabilities in excess of the carrying amount of closed block assets at the date Provident was acquired by the Company represents the maximum future earnings from the assets and liabilities designated to the closed block that can be recognized in income, for the benefit of stockholders, over the period the policies in the closed block remain in force.

If actual cumulative earnings exceed expected cumulative earnings, the expected earnings are recognized in income. This is because the excess cumulative earnings over expected cumulative earnings, which represents undistributed accumulated earnings attributable to policyholders, is recorded as a policyholder dividend obligation. Therefore, the excess will be paid to closed block policyholders as an additional policyholder dividend in the future unless it is otherwise offset by future performance of the closed block that is less favorable than originally expected. If actual cumulative performance is less favorable than expected, actual earnings will be recognized in income.

The principal cash flow items that affect the amount of closed block assets and liabilities are premiums, net investment income, purchases and sales of investments, policyholder benefits, policyholder dividends, premium taxes and income taxes. The principal income and expense items excluded from the closed block are management and maintenance expenses, commissions, net investment income, and realized investment gains and losses on investments held outside of the closed block that support the closed block business, all of which enter into the determination of total gross margins of closed block policies for the purpose of the amortization of VOBA.

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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

(i) Separate Accounts

Separate account assets and liabilities represent contractholders’ funds, which have been segregated into accounts with specific investment objectives. Separate account assets are recorded at fair value based primarily on market quotations of the underlying securities. The investment income and gains or losses of these accounts accrue directly to the contractholders. The activity of the separate accounts is not reflected in the consolidated statements of income except for (1) the fees the Company receives, which are assessed on a daily or monthly basis and recognized as revenue when assessed and earned, and (2) the activity related to guaranteed contracts, which are riders to existing variable annuity contracts.

(j) Future Policy Benefits and Claims

The process of calculating reserve amounts for a life insurance organization involves the use of a number of assumptions, including those related to persistency (how long a contract stays with a company), mortality (the relative incidence of death in a given time), morbidity (the relative incidence of disability resulting from disease or physical impairment) and interest rates (the rates expected to be paid or received on financial instruments, including insurance or investment contracts).

The Company calculates its liability for future policy benefits and claims for investment products in the accumulation phase and universal life and variable universal life insurance policies as the policy account balance, which represents participants’ net premiums and deposits plus investment performance and interest credited less applicable contract charges.

The Company’s liability for funding agreements to an unrelated third party trust equals the balance that accrues to the benefit of the contractholder, including interest credited. The funding agreements constitute insurance obligations and are considered annuity contracts under Ohio insurance laws.

The liability for future policy benefits and claims for traditional life insurance policies was calculated by the net level premium method using interest rates varying from 2.0% to 10.5% and estimates of mortality, morbidity, investment yields and withdrawals that were used or being experienced at the time the policies were issued.

The liability for future policy benefits for payout annuities was calculated using the present value of future benefits and maintenance costs discounted using interest rates varying generally from 3.0% to 13.0%.

(k) Participating Business

Participating business, which refers to policies that participate in profits through policyholder dividends, represented approximately 8% of the Company’s life insurance in force in 2006 (10% in 2005 and 11% in 2004), 60% of the number of life insurance policies in force in 2006 (62% in 2005 and 64% in 2004) and 8% of life insurance statutory premiums in 2006 (9% in 2005 and 12% in 2004). The provision for policyholder dividends was based on then current dividend scales and has been included in future policy benefits and claims in the consolidated balance sheets.

(l) Federal Income Taxes

The Company provides for federal income taxes based on amounts the Company believes it ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization

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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

of certain tax credits differs from estimates, the Company may be required to significantly change the provision for federal income taxes recorded in the consolidated financial statements. Any such change could significantly affect the amounts reported in the consolidated statements of income. Management has used best estimates to establish reserves based on current facts and circumstances regarding tax exposure items where the ultimate deductibility is open to interpretation. Management evaluates the appropriateness of such reserves quarterly based on any new developments specific to their fact patterns. Information considered includes results of completed tax examinations, Technical Advice Memorandums and other rulings issued by the Internal Revenue Service (IRS) or the tax courts.

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is determined that it is more likely than not that the deferred tax asset will not be fully realized.

(m) Reinsurance Ceded

Reinsurance premiums ceded and reinsurance recoveries on benefits and claims incurred are deducted from the respective income and expense accounts. Assets and liabilities related to reinsurance ceded are reported in the consolidated balance sheets on a gross basis, separately from the related balances of the Company.

(n) Discontinued Operations

During December 2006, the Company announced an agreement to sell The 401(k) Company for $115.0 million in cash, subject to a post-closing adjustment. The 401(k) Company provides administrative and record-keeping services to employers in the private sector for use in Internal Revenue Code (IRC) Section 401(k) retirement programs. The Company expects to record a gain on this transaction when it is finalized during the first quarter of 2007. Since this represents the Company’s exit from the large plan 401(k) market, the results of operations of The 401(k) Company are reflected as discontinued operations for 2006 and all prior years.

During the year ended December 31, 2005, the Company decided to discontinue the following operations: (1) Cap Pro Holding, Inc. (Cap Pro), a majority-owned subsidiary of NFS that provided broker/dealer, registered investment advisor and insurance agency services to producers of certain certified public accounting firms; (2) Nationwide Financial Services (Bermuda), Ltd. (NFSB), a wholly-owned subsidiary of NFS that sold variable and fixed annuity products in offshore markets; and (3) William J. Lynch & Associates, Inc. (TBG Lynch), a wholly-owned subsidiary of TBG Financial that distributed BOLI products.

The Company’s 2005 loss on discontinued operations, net of taxes, primarily consists of the following: (1) Cap Pro—$4.5 million; (2) NFSB—$8.3 million; and (3) TBG Lynch—$11.7 million. The results of operations of Cap Pro, NFSB and TBG Lynch are reflected as discontinued operations for 2005 and all prior years.

During the quarter ended June 30, 2005, the Company decided to dispose of Cap Pro. The 2005 loss on discontinued operations related to Cap Pro primarily was due to a $10.8 million goodwill impairment charge.

F-18

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

During December 2005, the Company sold its NFSB operations for $48.0 million in cash. The Company recorded a loss on the sale of $7.8 million, net of taxes.

Also in December 2005, the Company entered into an agreement to sell its TBG Lynch operations for a total of $10.2 million in cash and other consideration. As a result, the Company recorded a loss on the planned transaction of $11.7 million, net of taxes, primarily driven by the write-off of goodwill. The sale was finalized in February 2006.

(o) Share-Based Payments

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), and began expensing at fair value on a straight-line basis the costs resulting from share-based payment transactions. The Company recorded share-based payment expense of $8.6 million ($5.6 million net of taxes, or $0.04 per basic and diluted common share) for the year ended December 31, 2006.

Prior to 2006, the Company elected to follow Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for stock options granted to employees as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Under APB 25, the Company did not recognize share-based payment expense in its financial statements because the stock option awards qualified as fixed awards and the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of grant.

The following table summarizes the effect on net income and earnings per common share for the years ended December 31 if the Company had accounted for compensation cost for employee stock options in accordance with the fair value accounting method, as permitted by SFAS 123:

(in millions, except per share amounts)	2005		2004
Net income, as reported	$	598.7	$	502.0
Less total share-based payment expense determined under fair value method, net of taxes		7.9		7.5
Pro forma net income	$	590.8	$	494.5
Earnings per common share:
Basic, as reported	$	3.92	$	3.30
Basic, pro forma		3.86		3.25
Diluted, as reported		3.90		3.28
Diluted, pro forma		3.85		3.23

The Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (LTEP) covers selected employees, directors and agents of the Company and certain of its affiliates. The LTEP provides for the grant of any or all of the following types of stock-based compensation awards: (1) stock options for shares of Class A common stock; (2) restricted stock; (3) stock-based Nationwide value added (NVA) awards; (4) stock appreciation rights (SARs), either in tandem with stock options or freestanding; and (5) performance shares and performance units. The LTEP provides that it will remain in effect, subject to the right of the Company’s Board of Directors to terminate it sooner, until all shares subject to the LTEP have been delivered under awards. However, in no event may any LTEP award of incentive stock options

F-19

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

be granted on or after February 27, 2012. The number of shares of Class A common stock that may be issued under the LTEP, or as to which SARs or other awards may be granted, currently may not exceed 20.1 million. As of December 31, 2006, 11.1 million shares of Class A common stock options have been granted. Shares issued upon option exercise are new shares not issued from treasury.

Substantially all stock options (1) are non-qualified; (2) are granted with an exercise price at least equal to the fair value of shares on the grant date; (3) have a ten-year term; and (4) vest and become exercisable at the rate of one-third on each annual anniversary date of a three-year period of continued employment or upon retirement. In addition, all vested stock options are exercisable. Restricted stock awards are issued with a specific period of restriction varying by award as determined by the Compensation Committee of the Company’s Board of Directors (Compensation Committee). As of December 31, 2006, there were no outstanding NVA awards, SARs, performance shares or performance units payable in shares of Class A common stock.

The following table summarizes the Company’s stock option activity and related information for the year ended December 31, 2006:

	Options on Class A common stock		Weighted average exercise price
Outstanding, beginning of period	7,634,265		$	35.80
Granted	787,040			42.85
Exercised	(2,235,142	)		34.84
Cancelled	(211,020	)		41.68
Outstanding, end of period	5,975,143			36.88
Vested and exercisable, end of period	4,354,857		$	35.75

As of December 31, 2006, vested and exercisable stock options had an aggregate intrinsic value of approximately $80.3 million with a weighted average remaining contractual term of approximately 4.9 years. Stock options exercised during 2006 had an aggregate intrinsic value of approximately $26.7 million.

The following table summarizes information about nonvested employee stock options for the year ended December 31, 2006:

	Options on Class A common stock		Weighted average grant date fair value
Nonvested, beginning of period	2,284,011		$	9.92
Granted	787,040			14.06
Vested	(1,369,336	)		9.53
Cancelled	(81,429	)		11.55
Nonvested, end of period	1,620,286			12.18

As of December 31, 2006, the total share-based payment cost related to nonvested stock options not yet recognized was approximately $8.9 million. The weighted average period over which this cost is expected to be recognized is approximately 1 year.

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NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The fair values of stock options are estimated on the dates of grant using a Black-Scholes option-pricing model. In accordance with FASB Staff Position (FSP) FAS 123R-2, Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123R (FSP FAS 123R-2), the total of 745,818 stock options awarded by the Compensation Committee in February and March 2006 were not considered granted for accounting purposes until April 2006 when the awards were communicated to recipients. Accordingly, the fair values of these awards were not estimated until the April 2006 effective grant date, and the related expense was recognized in the financial statements beginning in the second quarter of 2006.

The following table summarizes the weighted average fair value of options granted and assumptions used to determine the fair value of options granted for the years ended December 31:

	2006			2005			2004
Fair value of options granted	$	14.06		$	11.04		$	10.49
Dividend yield		2.11	%		2.06	%		2.01	%
Expected volatility		31.88	%		32.78	%		31.30	%
Risk-free interest rate		4.92	%		3.78	%		3.14	%
Expected life (years)		5.9			5.5			5.5

The dividend yield was estimated considering current dividends and stock prices. Expected volatility was estimated using a weighted average of the Company’s historical actual experience. The risk-free interest rate was estimated based on a U.S. Treasury Bond yield with a remaining term approximating that of the expected option life. The expected option life was estimated using a weighted average of the Company’s actual experience assuming that outstanding options were exercised at the midpoint of the remaining term.

(p) Reclassification

Certain items in the 2005 and 2004 consolidated financial statements and related notes have been reclassified to conform to the current presentation.

(3) Recently Issued Accounting Standards

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statements No. 115 (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. In addition, SFAS 159 does not establish requirements for recognizing and measuring dividend income, interest income or interest expense, nor does it eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS No. 157, Fair Value Measurements (SFAS 157), and SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. The Company currently is evaluating the impact of adopting SFAS 159.

F-21

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability on its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year-end balance sheet, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end balance sheet is effective for fiscal years ending after December 15, 2008. If in the last quarter of the preceding fiscal year an employer enters into a transaction that results in a settlement or experiences an event that causes a curtailment of the plan, the related gain or loss pursuant to Statement 88 or 106 is required to be recognized in earnings that quarter. The adoption of SFAS 158 did not have a material impact on the Company’s financial position or results of operations.

In September 2006, the FASB issued SFAS 157. SFAS 157 provides enhanced guidance for using fair value to measure assets and liabilities. SFAS 157 also provides guidance regarding the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. SFAS 157 is not expected to have a material impact on the Company’s financial position or results of operations upon adoption.

In September 2006, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108 (SAB 108). SAB 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB 108 requires registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB 108 does not change the SEC’s previous guidance in SAB No. 99 on evaluating the materiality of misstatements. A registrant applying the new guidance for the first time that identifies material errors in existence at the beginning of the first fiscal year ending after November 15, 2006, may correct those errors through a one-time cumulative effect adjustment to beginning-of-year retained earnings. The cumulative effect alternative is available only if the application of the new guidance results in a conclusion that a material error exists as of the beginning of the first fiscal year ending after November 15, 2006, and those misstatements were determined to be immaterial based on a proper application of the registrant’s previous method for quantifying misstatements. Because of the beginning-of-year recognition of the cumulative effect adjustment, misstatements occurring in the year of adoption cannot be included in that adjustment. SAB 108 requires the following disclosures if a cumulative effect adjustment is recorded: the nature and amount of each individual error included in the cumulative effect adjustment; when and how each error arose; and the fact that the errors had previously been considered immaterial. The cumulative effect adjustment is available only for prior-year uncorrected misstatements. The adjustment should not include amounts related to changes in accounting estimates. SAB 108 did not have a material impact on the Company’s financial position or results of operations upon adoption.

In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48). FIN 48 clarifies the

F-22

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company plans to adopt FIN 48 effective January 1, 2007. FIN 48 is not expected to have a material impact on the Company’s financial position or results of operations upon adoption.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (SFAS 156). SFAS 156 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140). SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. SFAS 156 permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. An entity that uses derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities is required to account for those derivative instruments at fair value. Under SFAS 156, an entity can elect subsequent fair value measurement to account for its separately recognized servicing assets and servicing liabilities. By electing that option, an entity may simplify its accounting because SFAS 156 permits income statement recognition of the potential offsetting changes in fair value of those servicing assets and servicing liabilities and derivative instruments in the same accounting period. SFAS 156 is effective for fiscal years beginning after September 15, 2006, with early adoption permitted. The Company plans to adopt SFAS 156 effective January 1, 2007. SFAS 156 is not expected to have a material impact on the Company’s financial position or results of operations upon adoption.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS 155). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), and SFAS 140. SFAS 155 also resolves issues addressed in SFAS 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. In summary, SFAS 155: (1) permits an entity to make an irrevocable election to measure any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation at fair value in its entirety, with changes in fair value recognized in earnings; (2) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133; (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (5) amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of SFAS 155 may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Company elected to early adopt SFAS 155 as of January 1, 2006. On the date of adoption, there was no impact to the Company’s financial position or results of operations.

In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal

F-23

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, issued by the FASB. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs as a result of the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a new feature or coverage within a contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. Retrospective application of SOP 05-1 to previously issued financial statements is not permitted. Initial application of SOP 05-1 is required as of the beginning of an entity’s fiscal year. The Company will adopt SOP 05-1 effective January 1, 2007. Although the Company is currently unable to quantify the impact of adoption, SOP 05-1 is not expected to have a material impact on the Company’s financial position and/or results of operations.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154), which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 applies to all voluntary changes in accounting principle as well as to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with earlier adoption permitted. The Company adopted SFAS 154 effective January 1, 2006. SFAS 154 has not had any impact on the Company’s financial position or results of operations since adoption.

In December 2004, the FASB issued SFAS 123R, which replaces SFAS 123, and supersedes APB 25. SFAS 123R requires companies to expense at fair value all costs resulting from share-based payment transactions, except for equity instruments held by employee share ownership plans. SFAS 123R also amended SFAS No. 95, Statement of Cash Flows, to require excess tax benefits to be reported as a financing cash inflow rather than as a reduction of taxes paid. In March 2005, the SEC issued SAB No. 107, which summarizes the views of the SEC regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the SEC’s views on the valuation of share-based payments for public companies. The Company considered this guidance in its adoption of SFAS 123R. SFAS 123R as issued by the FASB was to be effective for the Company as of the beginning of the first reporting period that began after June 15, 2005. However, in April 2005, the SEC adopted a rule that amended the effective date of SFAS 123R. The SEC’s new rule allowed companies to implement SFAS 123R at the beginning of their next fiscal year, instead of the next reporting period, beginning after June 15, 2005. The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method. See Note 2(o) for a complete discussion of the Company’s share-based payments.

In October 2006, the FASB issued FSP FAS 123R-6, Technical Corrections of FASB Statement No. 123R (FSP FAS 123R-6). This FSP addresses certain technical corrections of SFAS 123R. The Company will apply the provisions in this FSP beginning January 1, 2007. FSP FAS 123R-6 is not expected to have a material impact on the Company’s financial position or results of operations upon adoption.

In October 2006, the FASB issued FSP FAS 123R-5, An Amendment of FSP FAS 123R-1 (FSP FAS 123R-5). This FSP addresses whether a modification of an instrument in connection with an equity restructuring should be considered a modification for purposes of applying FSP FAS 123R-1, Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123R. The Company will apply the provisions in this FSP beginning January 1, 2007. FSP FAS 123R-5 is not expected to have a material impact on the Company’s financial position or results of operations upon adoption.

F-24

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

In November 2005, the FASB issued FSP FAS 123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (FSP FAS 123R-3). This FSP provides a practical transition election related to accounting for the tax effects of share-based payment awards to employees. An entity can elect to follow the transition guidance for the additional paid-in capital pool in SFAS 123R or the alternative transition method described in this FSP. An entity that adopts SFAS 123R using either modified retrospective or modified prospective application may make a one-time election to adopt the transition method described in this FSP. The Company elected to use the alternative transition method effective January 1, 2006. The Company’s adoption of FSP FAS 123R-3 did not have a material impact on the Company’s financial position or results of operations.

In October 2005, the FASB issued FSP FAS 123R-2. This FSP is a practical accommodation in determining the grant date of an award subject to SFAS 123R, assuming all other criteria in the grant date definition have been met. According to this FSP, a mutual understanding of the key terms and conditions of an award to an individual employee will be presumed to exist at the date the award is approved in accordance with the relevant corporate governance requirements (that is, by the Board or management with the relevant authority) if certain conditions are met. The Company adopted FSP FAS 123R-2 effective January 1, 2006. FSP FAS 123R-2 has not had a material impact on the Company’s financial position or results of operations. See Note 2(o) for a discussion of the impact of FSP FAS 123R-2 on 2006 grants.

In July 2003, the AICPA issued SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1) to address many topics. The most significant topic affecting the Company was the accounting for contracts with guaranteed minimum death benefits (GMDB). SOP 03-1 requires companies to evaluate the significance of a GMDB to determine whether a contract should be accounted for as an investment or insurance contract. For contracts determined to be insurance contracts, companies are required to establish a reserve to recognize a portion of the assessment (revenue) that compensates the insurance company for benefits to be provided in future periods. The Company adopted SOP 03-1 effective January 1, 2004, which resulted in a $3.4 million charge, net of taxes, as the cumulative effect of adoption of this accounting principle.

The following table summarizes the components of cumulative effect adjustments recorded in the Company’s 2004 consolidated statements of income:

(in millions)	January 1, 2004
Increase in future policy benefits:
Ratchet interest crediting	$	(12.3	)
Secondary guarantees—life insurance		(2.4	)
GMDB claim reserves		(2.0	)
GMIB claim reserves		(0.4	)
Subtotal		(17.1	)
Adjustment to amortization of deferred policy acquisition costs related to above		11.9
Deferred federal income taxes		1.8
Cumulative effect of adoption of accounting principle, net of taxes	$	(3.4	)

F-25

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

(4) Fair Value of Financial Instruments

The following disclosures summarize the carrying amount and estimated fair value of the Company’s financial instruments. Certain assets and liabilities are specifically excluded from the disclosure requirements for financial instruments.

The fair value of a financial instrument is defined as the amount at which the financial instrument could be bought or sold, or in the case of liabilities incurred or settled, in a current transaction between willing parties. In cases where quoted market prices are not available, fair value is based on the best information available in the circumstances. Such estimates of fair value should consider prices for similar assets or similar liabilities and the results of valuation techniques to the extent available in the circumstances. Examples of valuation techniques include the present value of estimated expected future cash flows using discount rates commensurate with the risks involved, option-pricing models, matrix pricing, option-adjusted spread models and fundamental analysis. Valuation techniques for measuring assets and liabilities must be consistent with the objective of measuring fair value and should incorporate assumptions that market participants would use in their estimates of values, future revenues and future expenses, including assumptions about interest rates, default, prepayment and volatility.

Many of the Company’s assets and liabilities subject to these disclosure requirements are not actively traded, requiring fair values to be estimated by management using matrix pricing, present value or other suitable valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could cause these estimates to vary materially. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in the immediate settlement of the instruments.

Although insurance contracts are specifically exempted from the disclosure requirements (other than those that are classified as investment contracts), the Company’s estimate of the fair values of policy reserves on life insurance contracts is provided to make the fair value disclosures more meaningful.

The tax ramifications of the related unrealized gains and losses can have a significant effect on the estimates of fair value and have not been considered in arriving at such estimates.

In estimating its fair value disclosures, the Company used the following methods and assumptions:

Fixed maturity and equity securities available-for-sale and trading assets: See Note 2(b).

Mortgage loans on real estate, net: The fair values of mortgage loans on real estate are estimated using discounted cash flow analyses based on interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. Estimated fair value is based on the present value of expected future cash flows discounted at the loan’s effective interest rate.

Policy loans, short-term investments and cash: The carrying amounts reported in the consolidated balance sheets for these instruments approximate their fair values.

Separate account assets and liabilities: The fair values of assets held in separate accounts are based on quoted market prices of the underlying securities. The fair values of liabilities related to separate accounts are the amounts payable on demand, net of certain surrender charges.

F-26

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

Investment contracts: The fair values of the Company’s liabilities under investment type contracts are based on one of two methods. For investment contracts without defined maturities, fair value is the amount payable on demand, net of certain surrender charges. For investment contracts with known or determined maturities, fair value is estimated using discounted cash flow analysis. Interest rates used in this analysis are similar to currently offered contracts with maturities consistent with those remaining for the contracts being valued.

Policy reserves on life insurance contracts: Included are disclosures for individual life insurance, COLI, BOLI, universal life insurance and supplementary contracts with life contingencies for which the estimated fair value is the amount payable on demand. Also included are disclosures for the Company’s limited payment policies for which the Company has used discounted cash flow analyses to estimate fair value, similar to those used for investment contracts with known maturities.

Short-term debt, collateral received—securities lending and collateral received—derivatives: The carrying amounts reported in the consolidated balance sheets for these instruments approximate their fair values.

Long-term debt: The fair values for senior notes are based on quoted market prices. The fair values of the junior subordinated debentures issued to a related party are based on quoted market prices of the capital securities of Nationwide Financial Services Capital Trust I (Trust I), which approximate the fair value of this obligation.

Commitments to extend credit: Commitments to extend credit have nominal fair values because of the short-term nature of such commitments.

Interest rate and cross-currency interest rate swaps: The fair values for interest rate and cross-currency interest rate swaps are calculated with pricing models using current rate assumptions.

Interest rate futures contracts: The fair values for futures contracts are based on quoted market prices.

Other derivatives: The fair values for other derivatives are based on credit event probabilities, equity option index levels and broker valuations.

F-27

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The following table summarizes the carrying values and estimated fair values of financial instruments subject to disclosure requirements and policy reserves on life insurance contracts as of December 31:

	2006						2005
(in millions)	Carrying value			Estimated fair value			Carrying value			Estimated fair value
Assets
Investments:
Securities available-for-sale:
Fixed maturity securities	$	28,160.0		$	28,160.0		$	30,106.0		$	30,106.0
Equity securities		67.6			67.6			75.6			75.6
Trading assets		24.3			24.3			34.4			34.4
Mortgage loans on real estate, net		8,909.8			8,821.5			9,148.6			9,181.5
Policy loans		966.9			966.9			930.6			930.6
Short-term investments		2,215.6			2,215.6			2,073.2			2,073.2
Cash		20.2			20.2			16.4			16.4
Assets held in separate accounts		70,694.7			70,694.7			65,963.8			65,963.8
Liabilities
Investment contracts		(28,392.9	)		(26,610.2	)		(30,035.3	)		(27,825.9	)
Policy reserves on life insurance contracts		(9,704.9	)		(9,371.5	)		(9,712.8	)		(9,477.2	)
Short-term debt		(85.2	)		(85.2	)		(252.3	)		(252.3	)
Long-term debt		(1,398.5	)		(1,437.5	)		(1,398.0	)		(1,466.5	)
Collateral received—securities lending and derivatives		(1,070.5	)		(1,070.5	)		(1,431.4	)		(1,431.4	)
Liabilities related to separate accounts		(70,694.7	)		(69,262.2	)		(65,963.8	)		(64,518.1	)
Derivative financial instruments
Interest rate swaps hedging assets		4.2			4.2			3.3			3.3
Cross-currency interest rate swaps		66.1			66.1			178.5			178.5
Interest rate futures contracts		(2.4	)		(2.4	)		1.6			1.6
Other derivatives		128.2			128.2			41.1			41.1

(5) Derivative Financial Instruments

Qualitative Disclosures

Interest Rate Risk Management

The Company periodically purchases fixed rate investments to back variable rate liabilities. As a result, the Company can be exposed to interest rate risk due to the mismatch between variable rate liabilities and fixed rate assets. In an effort to mitigate this risk, the Company enters into various types of derivative instruments to minimize this mismatch, with fluctuations in the fair values of the derivatives offsetting changes in the fair values of the investments resulting from changes in interest rates. The Company principally uses pay fixed/receive variable interest rate swaps to manage this risk.

Under these interest rate swaps, the Company receives variable interest rate payments and makes fixed rate payments. The fixed interest paid on the swap offsets the fixed interest received on the investment, resulting in the Company receiving the variable interest payments on the swap, generally 3-month U.S. London Interbank Offered Rate (LIBOR), and the credit spread on the investment. The net receipt of a variable rate will then match the variable rate paid on the liability.

F-28

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

As a result of entering into commercial mortgage loan and private placement commitments, the Company is exposed to changes in the fair value of such commitments due to changes in interest rates during the commitment period prior to the loans being funded. In an effort to manage this risk, the Company enters into short U.S. Treasury futures during the commitment period. With short U.S. Treasury futures, if interest rates rise/fall, the gains/losses on the futures will offset the change in fair value of the commitment attributable to the change in interest rates.

The Company periodically purchases variable rate investments (i.e., commercial mortgage loans and corporate bonds). As a result, the Company can be exposed to variability in cash flows and investment income due to changes in interest rates. Such variability poses risks to the Company when the assets are funded with fixed rate liabilities. In an effort to manage this risk, the Company may enter into receive fixed/pay variable interest rate swaps.

In using these interest rate swaps, the Company receives fixed interest rate payments and makes variable rate payments. The variable interest paid on the swap offsets the variable interest received on the investment, resulting in the Company receiving the fixed interest payments on the swap and the credit spread on the investment. The net receipt of a fixed rate will then match the fixed rate paid on the liability.

The Company manages interest rate risk at the segment level. Different segments may simultaneously hedge interest rate risks associated with owning fixed and variable rate investments considering the risk relevant to a particular segment.

Foreign Currency Risk Management

In conjunction with the Company’s medium-term note (MTN) program, the Company periodically issues both fixed and variable rate liabilities denominated in foreign currencies. As a result, the Company is exposed to changes in fair value of the liabilities due to changes in foreign currency exchange rates and related interest rates. In an effort to manage these risks, the Company enters into cross-currency interest rate swaps to convert these liabilities to a U.S. dollar rate.

The Company is exposed to changes in fair value of fixed rate investments denominated in a foreign currency due to changes in foreign currency exchange rates and related interest rates. In an effort to manage this risk, the Company uses cross-currency interest rate hedges to swap these asset characteristics to variable U.S. dollar rate instruments. Cross-currency interest rate swaps on assets are structured to pay a fixed rate, in the foreign currency, and receive a variable U.S. dollar rate, generally 3-month U.S. LIBOR. These derivative instruments are designated as a fair value hedge of the fixed rate foreign denominated asset.

For a variable rate foreign liability, the cross-currency interest rate swap is structured to receive a variable rate, in the foreign currency, and pay a variable U.S. dollar rate, generally 3-month U.S. LIBOR. As both sides of the cross-currency interest rate swap are variable, the derivative instrument is a basis swap. While the receive-side terms of the cross-currency interest rate swap will line up with the terms of the liability, the Company is not able to match the pay-side terms of the derivative to a specific asset. Therefore, these derivative instruments do not receive hedge accounting treatment.

Cross-currency interest rate swaps on variable rate investments are structured to pay a variable rate, in the foreign currency, and receive a fixed U.S. dollar rate. The terms of the foreign currency paid on the swap will exactly match the terms of the foreign currency received on the asset, thus eliminating currency risk. These derivative instruments are designated as a cash flow hedge.

F-29

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

Equity Market Risk Management

Asset fees calculated as a percentage of the separate account assets are a significant source of revenue to the Company. As of December 31, 2006, approximately 83% of separate account assets were invested in equity mutual funds (approximately 83% as of December 31, 2005). Gains and losses in the equity markets result in corresponding increases and decreases in the Company’s separate account assets and asset fee revenue. In addition, a decrease in separate account assets may decrease the Company’s expectations of future profit margins due to a decrease in asset fee revenue and/or an increase in guaranteed contract claims, which also may require the Company to accelerate the amortization of DAC.

The Company’s long-term assumption for net separate account returns is 8% annual growth. If equity markets were unchanged throughout a given year, the Company estimates that its net earnings per diluted share, calculated using current weighted average diluted shares outstanding, would be approximately $0.05 to $0.10 less than had the Company’s long-term assumption for net separate account returns been realized. This analysis assumes no other factors change and that an unlocking of DAC assumptions would not be required. However, as it does each quarter, the Company would evaluate its DAC balance and underlying assumptions to determine whether unlocking is appropriate. The Company can provide no assurance that the experience of flat equity market returns would not result in changes to other factors affecting profitability, including the possibility of unlocking of DAC assumptions.

Many of the Company’s individual variable annuity contracts offer GMDB features. A GMDB generally provides a benefit if the annuitant dies and the contract value is less than a specified amount, which may be based on the premiums paid less amounts withdrawn or contract value on a specified anniversary date. A decline in the stock market causing the contract value to fall below this specified amount, which varies from contract to contract based on the date the contract was entered into as well as the GMDB feature elected, will increase the net amount at risk, which is the GMDB in excess of the contract value. This could result in additional GMDB claims.

In an effort to mitigate this risk, the Company has implemented a GMDB economic hedging program for certain new and existing business. Prior to implementation of the GMDB hedging program in 2000, the Company managed this risk primarily by entering into reinsurance arrangements. The GMDB economic hedging program is designed to offset changes in the economic value of the GMDB obligation up to a return of the contractholder’s premium payments. However, the first 10% of GMDB claims are not hedged. Currently the program shorts S&P 500 Index futures, which provides an offset to changes in the value of the designated obligation. The futures are not designated as hedges and, therefore, hedge accounting is not applied. The Company’s economic evaluation of the GMDB obligation is not consistent with current accounting treatment of the GMDB obligation. Therefore, the hedging activity is likely to lead to earnings volatility. This volatility was negligible in 2006. As of December 31, 2006 and 2005, the net amount at risk was $574.3 million and $1.10 billion before reinsurance, respectively, and $122.2 million and $184.3 million net of reinsurance, respectively. As of December 31, 2006 and 2005, the Company’s reserve for GMDB claims was $29.6 million and $27.2 million, respectively. See Note 3 to the audited consolidated financial statements included in the F pages of this report for discussion of the impact of adopting a new accounting principle regarding GMDB reserves in 2004.

The Company also offers certain variable annuity products with a guaranteed minimum accumulation benefits (GMAB) rider. A GMAB provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified period of time (5, 7 or 10 years) selected by the contractholder at the time of issuance of the variable annuity contract. In some cases, the contractholder also has the option, after a specified period of time, to drop the rider and continue the variable annuity contract without the GMAB.

F-30

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The design of the GMAB rider limits the risk to the Company in a variety of ways including asset allocation requirements, which serve to reduce the Company’s potential exposure to underlying fund performance risks. Specifically, the GMAB terms limit asset allocation by (1) requiring partial allocation of assets to a guaranteed term option (a fixed rate investment option) and excluding certain funds that are highly volatile or difficult to hedge or (2) requiring all assets be allocated to one of the approved asset allocation funds or models defined by the Company. A GMAB represents an embedded derivative in the variable annuity contract that is required to be separated from, and valued apart from, the host variable annuity contract. The embedded derivative is carried at fair value and reported in other future policy benefits and claims. The Company initially records an offset to the fair value of the embedded derivative on the balance sheet, which is amortized through the income statement over the term of the GMAB period of the contract. Subsequent changes in the fair value of the embedded derivative are recognized in earnings. The fair value of the GMAB embedded derivative is calculated based on actuarial assumptions related to the projected benefit cash flows incorporating numerous assumptions including, but not limited to, expectations of contractholder persistency, market returns, correlations of market returns and market return volatility.

The Company began selling contracts with the GMAB feature on May 1, 2003. Beginning October 1, 2003, the Company launched an enhanced version of the rider that offered increased equity exposure to the contractholder in return for a higher charge. The Company simultaneously began economically hedging the GMAB exposure for those risks that exceed a level it considered acceptable. The GMAB economic hedge consists of shorting interest rate futures and S&P 500 Index futures contracts and does not qualify for hedge accounting under current guidance. Quarterly, the Company purchases S&P 500 Index put options and over-the-counter basket put options, which are constructed in order to minimize the tracking error of the hedge and the GMAB liability. See Note 2(c) to the audited consolidated financial statements included in the F pages of this report for discussion of economic hedges. The objective of the GMAB economic hedge strategy is to manage the exposures with risk beyond a level considered acceptable to the Company. The Company is exposed to equity market risk related to the GMAB feature should the growth in the underlying investments, including any GTO investment, fail to reach the guaranteed return level. The GMAB embedded derivative is likely to create volatility in earnings; however, the economic hedging program provides substantial mitigation of this exposure. This volatility was negligible in 2006 and 2005. As of December 31, 2006 and 2005, the balance of the GMAB embedded derivative was $116.3 million and $67.9 million, respectively. The increase in the balance of the GMAB embedded derivative was driven by the value of new business sold during 2006.

Beginning in March 2005, the Company began offering a hybrid GMAB/guaranteed lifetime withdrawal benefit (GLWB) through its Capital Preservation Plus Lifetime Income (CPPLI) contract rider. This living benefit combines a GMAB feature in its first 5-10 years with a lifetime withdrawal benefit which begins upon the maturity of the GMAB and extends for the duration of the insured’s life. In the event that the insured’s contract value is exhausted through such withdrawals, the Company will continue to fund future withdrawals at a pre-defined level until the insured’s death. In some cases, the contract owner has the right to drop the GLWB portion of this rider or periodically reset the guaranteed withdrawal basis to a higher level. This benefit requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy as previously described above.

In March 2006, the Company added Lifetime Income (LINC), a stand-alone GLWB, to compliment CPPLI in its product offerings. This rider is very similar to the hybrid benefit discussed above. LINC provides for enhanced retirement income security via guaranteed accumulation rates and withdrawal rates that increase with age without the liquidity loss associated with annuitization. The lifetime withdrawal feature also is being economically hedged. Currently, the Company is using S&P 500 Index and U.S. Treasury futures to hedge exposure to declining equity and interest rate markets, respectively. Similar to GMDBs, the Company’s economic valuation of the lifetime income obligation is not consistent with the accounting treatment of the obligation. Therefore, hedging activity is likely to create volatility in earnings; however, the economic hedging program provides substantial mitigation of this exposure. This volatility was negligible in 2006.

Other Non-Hedging Derivatives

The Company periodically enters into basis swaps (receive one variable rate, pay another variable rate) to better match the cash flows received from the specific variable-rate investments with the variable rate paid on a

F-31

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

group of liabilities. While the pay-side terms of the basis swap will line up with the terms of the asset, the Company is not able to match the receive-side terms of the derivative to a specific liability. Therefore, basis swaps do not receive hedge accounting treatment.

The Company sells credit default protection on selected debt instruments and combines the credit default swap with selected assets the Company owns to replicate a higher yielding bond. These selected assets may have sufficient duration for the related liability, but do not earn a sufficient credit spread. The combined credit default swap and investments provide cash flows with the duration and credit spread targeted by the Company. The credit default swaps do not qualify for hedge accounting treatment.

The Company also has purchased credit default protection on selected debt instruments exposed to short-term credit concerns, or because the combination of the corporate bond and purchased default protection provides sufficient spread and duration targeted by the Company. The purchased credit default protection does not qualify for hedge accounting treatment.

Quantitative Disclosure

Fair Value Hedges

During the years ended December 31, 2006, 2005 and 2004, a net gain of $2.9 million, a net gain of $4.1 million and a net loss of $11.3 million, respectively, were recognized in net realized gains and losses on investments, hedging instruments and hedged items. This represents the ineffective portion of the fair value hedging relationships. There were no gains or losses attributable to the portion of the derivative instruments’ changes in fair value excluded from the assessment of hedge effectiveness. There were also no gains or losses recognized in earnings as a result of hedged firm commitments no longer qualifying as fair value hedges.

Cash Flow Hedges

For the years ended December 31, 2006, 2005 and 2004, the ineffective portion of cash flow hedges was a net loss of $1.5 million, a net gain of $3.2 million and a net gain of $0.8 million, respectively. There were no net gains or losses attributable to the portion of the derivative instruments’ changes in fair value excluded from the assessment of hedge effectiveness.

The Company anticipates reclassifying less than $0.8 million in net losses out of AOCI over the next 12-month period.

In general, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows associated with forecasted transactions, other than those relating to variable interest on existing financial instruments, is twelve months or less.

Immediately prior to the sale of NFSB in 2005, the Company sold two variable rate bonds whose future cash flows had been designated as the forecasted transactions in two cash flow hedging relationships. As the forecasted transactions were probable not to occur, the Company ceased accounting for the derivatives as cash flow hedging instruments as of the date the bonds were sold and reclassified the derivative loss from AOCI to earnings, resulting in a $3.9 million realized loss. Since these bonds were sold as a direct result of the sale of NFSB, and because business disposals are infrequent, the Company does not believe that its ability to accurately forecast similar future transactions is affected.

F-32

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

During 2006, the Company did not discontinue any cash flow hedges because the original forecasted transaction was no longer probable. Additionally, no amounts were reclassified from AOCI into earnings due to the probability that a forecasted transaction would not occur.

Other Derivative Instruments, Including Embedded Derivatives

Net realized gains and losses on investments, hedging instruments and hedged items for the years ended December 31, 2006, 2005 and 2004 included a net loss of $0.5 million, a net loss of $9.1 million and a net gain of $9.1 million, respectively, related to other derivative instruments, including embedded derivatives, not designated in hedging relationships. In addition, the Individual Investments segment included a loss of $11.4 million and a gain of $5.5 million for the years ended December 31, 2006 and 2005, respectively, related to other derivative instruments, including embedded derivatives, not designated in hedging relationships. For the years ended December 31, 2006, 2005 and 2004, net losses of $10.6 million, $80.7 million and $5.9 million, respectively, were recorded in net realized gains and losses on investments, hedging instruments and hedged items reflecting the change in fair value of cross-currency interest rate swaps hedging variable rate MTNs denominated in foreign currencies. Additional net gains of $14.1 million, $78.3 million and $5.9 million were recorded in net realized gains and losses on investments, hedging instruments and hedged items to reflect the change in spot rates of these foreign currency denominated obligations during the years ended December 31, 2006, 2005 and 2004, respectively.

The following table summarizes the notional amount of derivative financial instruments outstanding as of December 31:

(in millions)	2006		2005
Interest rate swaps:
Pay fixed/receive variable rate swaps hedging investments	$	1,930.5	$	2,040.1
Pay variable/receive fixed rate swaps hedging investments		60.4		79.2
Pay variable/receive fixed rate swaps hedging liabilities		—		550.0
Pay variable/receive variable rate swaps hedging liabilities		—		30.0
Pay fixed/receive variable rate swaps hedging liabilities		1,048.8		170.0
Other contracts hedging investments		—		10.0
Cross-currency interest rate swaps:
Hedging foreign currency denominated investments		452.9		439.8
Hedging foreign currency denominated liabilities		1,137.1		1,312.4
Credit default swaps and other non-hedging instruments		478.6		555.3
Equity option contracts		1,640.7		774.4
Interest rate futures contracts		214.2		120.5
Total	$	6,963.2	$	6,081.7

F-33

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

(6) Investments

The following table summarizes the amortized cost, gross unrealized gains and losses, and estimated fair values of securities available-for-sale as of the dates indicated:

(in millions)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Estimated fair value
December 31, 2006:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	179.0	$	12.2	$	2.1	$	189.1
Agencies not backed by the full faith and credit of the U.S. Government		564.5		46.2		2.3		608.4
Obligations of states and political subdivisions		274.7		0.7		7.4		268.0
Debt securities issued by foreign governments		36.2		1.7		0.2		37.7
Corporate securities
Public		9,732.8		220.0		127.4		9,825.4
Private		6,605.1		131.5		83.8		6,652.8
Mortgage-backed securities—U.S. Government-backed		6,946.0		23.8		122.8		6,847.0
Asset-backed securities		3,728.9		45.5		42.8		3,731.6
Total fixed maturity securities		28,067.2		481.6		388.8		28,160.0
Equity securities		57.2		11.0		0.6		67.6
Total securities available-for-sale	$	28,124.4	$	492.6	$	389.4	$	28,227.6
December 31, 2005:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	197.1	$	14.4	$	1.2	$	210.3
Agencies not backed by the full faith and credit of the U.S. Government		882.3		61.2		6.7		936.8
Obligations of states and political subdivisions		314.5		2.4		3.9		313.0
Debt securities issued by foreign governments		42.7		2.7		0.1		45.3
Corporate securities
Public		10,728.5		302.0		122.0		10,908.5
Private		7,199.3		200.7		77.5		7,322.5
Mortgage-backed securities—U.S. Government-backed		6,824.7		21.3		117.0		6,729.0
Asset-backed securities		3,641.7		44.2		45.3		3,640.6
Total fixed maturity securities		29,830.8		648.9		373.7		30,106.0
Equity securities		64.8		11.2		0.4		75.6
Total securities available-for-sale	$	29,895.6	$	660.1	$	374.1	$	30,181.6

F-34

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The table below summarizes the amortized cost and estimated fair values of fixed maturity securities available-for-sale, by maturity, as of December 31, 2006. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(in millions)	Amortized cost			Estimated fair value
Fixed maturity securities available-for-sale:
Due in one year or less	$	1,561.3		$	1,572.6
Due after one year through five years		7,022.1			7,072.1
Due after five years through ten years		5,191.9			5,225.0
Due after ten years		3,617.0			3,711.7
Subtotal		17,392.3			17,581.4
Mortgage-backed securities—U.S. Government-backed		6,946.0			6,847.0
Asset-backed securities		3,728.9			3,731.6
Total	$	28,067.2		$	28,160.0
The following table presents the components of net unrealized gains on securities available-for-sale, as of December 31:
(in millions)	2006			2005
Net unrealized gains, before adjustments and taxes	$	103.2		$	286.0
Adjustment to DAC		83.3			42.8
Adjustment to VOBA		(6.6	)		6.8
Adjustment to future policy benefits and claims		(86.8	)		(109.9	)
Adjustment to policyholder dividend obligation		(16.0	)		(30.7	)
Deferred federal income taxes		(27.1	)		(68.3	)
Net unrealized gains	$	50.0		$	126.7

The following table presents an analysis of the net decrease in net unrealized gains on securities available-for-sale before adjustments and taxes for the years ended December 31:

(in millions)	2006			2005			2004
Fixed maturity securities	$	(182.4	)	$	(818.4	)	$	(130.6	)
Equity securities		(0.4	)		(3.1	)		2.2
Net change	$	(182.8	)	$	(821.5	)	$	(128.4	)

F-35

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The following table summarizes by time the gross unrealized losses on securities available-for-sale in an unrealized loss position as of the dates indicated:

	Less than or equal to one year					More Than one year					Total
(in millions)	Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses
December 31, 2006:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations	$	66.5	$	1.0		$	29.9	$	1.1		$	96.4	$	2.1
Agencies not backed by the full faith and credit of the U.S. Government		31.7		0.1			125.2		2.2			156.9		2.3
Obligations of states and political subdivisions		84.5		1.0			161.9		6.4			246.4		7.4
Debt securities issued by foreign governments		12.8		0.1			1.3		0.1			14.1		0.2
Corporate securities
Public		2,627.7		27.8			3,525.8		99.6			6,153.5		127.4
Private		1,288.6		15.0			2,165.1		68.8			3,453.7		83.8
Mortgage-backed securities—U.S. Government-backed		966.9		7.6			4,194.0		115.2			5,160.9		122.8
Asset-backed securities		580.2		4.5			1,475.0		38.3			2,055.2		42.8
Total fixed maturity securities		5,658.9		57.1			11,678.2		331.7			17,337.1		388.8
Equity securities		17.6		0.3			3.4		0.3			21.0		0.6
Total	$	5,676.5	$	57.4		$	11,681.6	$	332.0		$	17,358.1	$	389.4
% of gross unrealized losses				15	%				85	%
December 31, 2005:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	37.4	$	0.8		$	11.6	$	0.4		$	49.0	$	1.2
Agencies not backed by the full faith and credit of the U.S. Government		329.2		5.4			42.2		1.3			371.4		6.7
Obligations of states and political subdivisions		157.8		3.1			29.7		0.8			187.5		3.9
Debt securities issued by foreign governments		8.6		0.1			—		—			8.6		0.1
Corporate securities
Public		3,731.0		73.4			1,247.0		48.6			4,978.0		122.0
Private		1,957.3		46.5			767.7		31.0			2,725.0		77.5
Mortgage-backed securities—U.S. Government-backed		4,526.2		96.0			702.9		21.0			5,229.1		117.0
Asset-backed securities		1,516.4		28.2			490.2		17.1			2,006.6		45.3
Total fixed maturity securities		12,263.9		253.5			3,291.3		120.2			15,555.2		373.7
Equity securities		20.8		0.4			—		—			20.8		0.4
Total	$	12,284.7	$	253.9		$	3,291.3	$	120.2		$	15,576.0	$	374.1
% of gross unrealized losses				68	%				32	%

F-36

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

Increases in unrealized losses more than one year are primarily due to changes in the interest rate environment. Those securities are not considered other-than-temporarily impaired because the decline in market value is attributed to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until recovery.

Proceeds from the sale of securities available-for-sale during 2006, 2005 and 2004 were $2.65 billion, $3.48 billion and $3.77 billion, respectively. During 2006, gross gains of $66.6 million ($88.5 million and $92.3 million in 2005 and 2004, respectively) and gross losses of $71.2 million ($24.1 million and $13.4 million in 2005 and 2004, respectively) were realized on those sales.

The Company had $5.1 million and $22.2 million of real estate investments as of December 31, 2006 and 2005, respectively, that were non-income producing during the preceding twelve months.

Real estate held for use is presented at cost less accumulated depreciation of $20.5 million as of December 31, 2006 ($24.5 million as of December 31, 2005). The carrying value of real estate held for sale totaled $43.5 million and $2.5 million as of December 31, 2006 and 2005, respectively.

The recorded investment of mortgage loans on real estate considered to be impaired was $17.5 million as of December 31, 2006 ($34.5 million as of December 31, 2005), for which the related valuation allowance was $12.3 million ($9.4 million as of December 31, 2005). Impaired mortgage loans with no valuation allowance are a result of collateral dependent loans where the fair value of the collateral is estimated to be greater than the recorded investment of the loan. During 2006, the average recorded investment in impaired mortgage loans on real estate was $3.5 million ($9.9 million in 2005). Interest income on those loans, which is recognized on a cash basis, totaled $1.9 million in 2006 ($2.1 million in 2005).

The following table summarizes activity in the valuation allowance account for mortgage loans on real estate for the years ended December 31:

(in millions)	2006			2005			2004
Allowance, beginning of period	$	35.1		$	36.9		$	32.4
Net additions (reductions) to allowance		0.9			(1.8	)		4.5
Allowance, end of period	$	36.0		$	35.1		$	36.9
The following table summarizes net realized gains (losses) on investments, hedging instruments and hedged items from continuing operations by source for the periods indicated:
(in millions)	2006			2005			2004
Total realized gains on sales, net of hedging losses		98.7			98.5			100.9
Total realized losses on sales, net of hedging gains		(75.6	)		(28.7	)		(29.9	)
Total other-than-temporary and other investment impairments		(16.8	)		(41.2	)		(103.3	)
Credit default swaps		(1.1	)		(7.5	)		0.3
Periodic net coupon settlements on non-qualifying derivatives		1.9			1.0			6.5
Other derivatives		(0.6	)		1.2			(5.1	)
Trading portfolio valuation gain		—			0.4			0.8
Total realized gains (losses) before adjustments		6.5			23.7			(29.8	)
Amounts credited to policyholder dividend obligation		0.1			(5.2	)		(7.0	)
Other		2.5			2.3			4.6
Net realized gains (losses) on investments, hedging instruments and hedged items	$	9.1		$	20.8		$	(32.2	)

F-37

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The following table summarizes net investment income from continuing operations by investment type for the years ended December 31:

(in millions)	2006			2005			2004
Securities available-for-sale:
Fixed maturity securities	$	1,582.4		$	1,628.8		$	1,630.6
Equity securities		3.5			4.4			1.3
Trading assets		2.1			2.2			0.2
Mortgage loans on real estate		577.7			619.5			615.1
Real estate		17.8			16.5			17.7
Short-term investments		56.6			23.5			11.1
Derivatives		(1.9	)		(31.0	)		(94.3	)
Other		132.9			143.2			108.1
Gross investment income		2,371.1			2,407.1			2,289.8
Less investment expenses		72.6			63.2			58.1
Net investment income	$	2,298.5		$	2,343.9		$	2,231.7

Fixed maturity securities with an amortized cost of $21.7 million and $30.2 million as of December 31, 2006 and 2005, respectively, were on deposit with various regulatory agencies as required by law.

As of December 31, 2006, the Company had not pledged any fixed maturity securities as collateral to various derivative counterparties compared to $8.6 million as of December 31, 2005.

As of December 31, 2006 and 2005, the Company had received $886.7 million and $1.17 billion, respectively, of cash collateral on securities lending and $171.0 million and $203.3 million, respectively, of cash for derivative collateral. As of December 31, 2006, the Company had not received any non-cash collateral on securities lending compared to $5.9 million as of December 31, 2005. Both the cash and non-cash collateral amounts are included in short-term investments with a corresponding liability recorded in other liabilities. As of December 31, 2006 and 2005, the Company had loaned securities with a fair value of $859.9 million and $1.14 billion, respectively. The Company also held $12.8 million and $53.2 million of securities as off-balance sheet collateral on derivative transactions as of December 31, 2006 and 2005, respectively.

(7) Value of Business Acquired and Other Intangible Assets

The following table presents a reconciliation of VOBA for the years ended December 31:

(in millions)	2006			2005
Balance at beginning of period	$	449.7		$	480.4
Amortization of VOBA		(46.0	)		(45.0	)
Net realized losses on investments		2.4			2.3
Subtotal		406.1			437.7
Change in unrealized gain on available-for-sale securities		(13.4	)		12.0
Balance at end of period	$	392.7		$	449.7

Interest on the unamortized VOBA balance (at interest rates ranging from 4.50% to 7.56%) is included in amortization and was $27.5 million, $30.3 million and $33.0 million during the years ended December 31, 2006, 2005 and 2004, respectively.

F-38

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The following table summarizes intangible assets as of December 31:

		2006				2005
(in millions)	Initial useful life1	Gross carrying amount		Accumulated amortization		Gross carrying amount		Accumulated amortization
Amortizing:
VOBA	28 years	$	594.9	$	195.6	$	594.9	$	152.1
Distribution forces	20 years		30.4		2.6		30.4		1.6
Other	14 years		14.9		7.1		14.6		5.8
Total amortizing intangible assets			640.2		205.3		639.9		159.5
Non-amortizing:
State insurance licenses	Indefinite		8.0		—		8.0		—
Total intangible assets		$	648.2	$	205.3	$	647.9	$	159.5

¹ The initial useful life was based on applicable assumptions. Actual periods are subject to revision based on variances from assumptions and other relevant factors. The state insurance licenses have indefinite lives and therefore are not amortized.

The Company’s annual impairment testing did not result in material impairment losses on existing intangible assets during 2006, 2005 and 2004.

Based on current assumptions, which are subject to change, the following table summarizes estimated amortization for the next five years ended December 31:

(in millions)	VOBA	Intangible assets with finite lives	Total intangible assets
2007	36.8	2.0	38.8
2008	33.8	1.9	35.7
2009	32.0	2.0	34.0
2010	26.4	2.2	28.6
2011	24.7	2.3	27.0

(8) Goodwill

The following table summarizes changes in the carrying value of goodwill by segment for the years indicated:

(in millions)	Retirement Plans		Individual Protection			Corporate and Other			Total
Balance as of December 31, 2004	$	64.1	$	307.4		$	10.8		$	382.3
Adjustments		18.1		—			—			18.1
Disposal/impairment		—		(25.1	)		(10.8	)		(35.9	)
Balance as of December 31, 2005		82.2		282.3			—			364.5
Disposal/impairment		—		(5.5	)		—			(5.5	)
Balance as of December 31, 2006	$	82.2	$	276.8		$	—		$	359.0

F-39

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The 2005 acquisition of goodwill reflects the Company’s acquisition of Registered Investment Advisors Services, Inc. d/b/a RIA Services, Inc. (RIA) effective February 28, 2005. The aggregate purchase price was $18.1 million. The other 2005 activity relates to discontinued operations. See Note 2(n) for more information.

The 2006 goodwill impairment represents a write-down to fair value of the portion of NFS’ investment in TBG Financial that was contributed to a joint venture between TBG Financial and MC Insurance Agency Services, LLC d/b/a Mullin Consulting during the first quarter of 2006.

The Company’s 2006 annual impairment testing did not result in any other impairment losses on existing goodwill.

(9) Closed Block

The amounts shown in the following tables for assets, liabilities, revenues and expenses of the closed block of NLICA are those that enter into the determination of amounts that are to be paid to policyholders.

The following table summarizes financial information for the closed block as of December 31:

(in millions)	2006			2005
Closed block liabilities:
Future policyholder benefits	$	1,881.0		$	1,903.3
Policyholder funds and accumulated dividends		141.5			144.3
Policyholder dividends payable		30.1			28.1
Policyholder dividend obligation		64.0			73.2
Other policy obligations		10.2			8.1
Other closed block liabilities		0.4			0.9
Total closed block liabilities		2,127.2			2,157.9
Closed block assets:
Fixed maturity securities available-for-sale, at estimated fair value		1,154.5			1,209.5
Mortgage loans on real estate		344.9			363.1
Policy loans		206.8			213.1
Other closed block assets		159.2			98.2
Total closed block assets		1,865.4			1,883.9
Excess of reported closed block liabilities over closed block assets		261.8			274.0
Portion of above representing other comprehensive income:
Decrease in unrealized gain on fixed maturity securities available-for-sale		(14.8	)		(34.7	)
Adjustment to policyholder dividend obligation		14.8			34.7
Total		—			—
Maximum future earnings to be recognized from closed block assets and liabilities	$	261.8		$	274.0
Other comprehensive income:
Fixed maturity securities available-for-sale:
Fair value	$	1,154.5		$	1,209.5
Amortized cost		1,138.6			1,178.8
Shadow policyholder dividend obligation		(15.9	)		(30.7	)
Net unrealized appreciation	$	—		$	—

F-40

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The following table summarizes closed block operations for the years ended December 31:

(in millions)	2006			2005			2004
Closed block revenues:
Premiums	$	98.0		$	104.4		$	107.3
Net investment income		105.0			110.2			110.8
Realized investment (losses) gains		(4.1	)		1.2			(1.7	)
Realized losses credited to policyholder benefit obligation		0.1			(5.2	)		(7.2	)
Total closed block revenues		199.0			210.6			209.2
Closed block benefits and expenses:
Policy and contract benefits		137.9			142.7			136.8
Change in future policyholder benefits and interest credited to policyholder account values		(22.8	)		(28.5	)		(19.6	)
Dividends to policyholders		58.3			55.6			57.1
Change in policyholder dividend obligation		5.7			17.7			7.0
Other closed block expenses		1.2			1.2			1.4
Total closed block benefits and expenses		180.3			188.7			182.7
Total closed block revenues, net of closed block benefits and expenses, before federal income taxes		18.7			21.9			26.5
Federal income taxes		6.5			7.7			9.3
Closed block revenues, net of closed block benefits and expenses and federal income taxes	$	12.2		$	14.2		$	17.2
Maximum future earnings from closed block assets and liabilities:
Beginning of period	$	274.0		$	288.2		$	305.4
Change during period		(12.2	)		(14.2	)		(17.2	)
Other adjustments		—			—			—
End of period	$	261.8		$	274.0		$	288.2

Cumulative closed block earnings from inception through December 31, 2006 and 2005 were higher than expected as determined in the actuarial calculation. Therefore, policyholder dividend obligations (excluding the adjustment for unrealized gains on available-for-sale securities) were $48.1 million and $42.5 million at December 31, 2006 and 2005, respectively. Other adjustments include revisions to the prior year-end balances including primarily policyholder dividends payable and adjustments to current and deferred taxes.

(10) Variable Annuity Contracts

The Company issues traditional variable annuity contracts through its separate accounts, for which investment income and gains and losses on investments accrue directly to, and investment risk is borne by, the contractholder. The Company also issues non-traditional variable annuity contracts in which the Company provides various forms of guarantees to benefit the related contractholders. The Company provides four primary guarantee types under non-traditional variable annuity contracts: (1) GMDB; (2) GMAB; (3) guaranteed minimum income benefits (GMIB); and (4) a hybrid guarantee with GMAB and GLWB.

The GMDB provides a specified minimum return upon death. Many of these death benefits are spousal, whereby a death benefit will be paid upon death of the first spouse. The survivor has the option to terminate the

F-41

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

contract or continue it and have the death benefit paid into the contract and a second death benefit paid upon the survivor’s death. The Company has offered six primary GMDB types:

• Return of premium—provides the greater of account value or total deposits made to the contract less any partial withdrawals and assessments, which is referred to as “net premiums.” There are two variations of this benefit. In general, there is no lock-in age for this benefit. However, for some contracts the GMDB reverts to the account value at a specified age, typically age 75.

• Reset—provides the greater of a return of premium death benefit or the most recent five-year anniversary (prior to lock-in age) account value adjusted for withdrawals. For most contracts, this GMDB locks in at age 86 or 90, and for others the GMDB reverts to the account value at age 75, 85, 86 or 90.

• Ratchet—provides the greater of a return of premium death benefit or the highest specified “anniversary” account value (prior to age 86) adjusted for withdrawals. Currently, there are three versions of ratchet, with the difference based on the definition of anniversary: monthaversary—evaluated monthly; annual—evaluated annually; and five-year—evaluated every fifth year.

• Rollup—provides the greater of a return of premium death benefit or premiums adjusted for withdrawals accumulated at generally 5% simple interest up to the earlier of age 86 or 200% of adjusted premiums. There are two variations of this benefit. For certain contracts, this GMDB locks in at age 86, and for others the GMDB reverts to the account value at age 75.

• Combo—provides the greater of annual ratchet death benefit or rollup death benefit. This benefit locks in at either age 81 or 86.

• Earnings enhancement—provides an enhancement to the death benefit that is a specified percentage of the adjusted earnings accumulated on the contract at the date of death. There are two versions of this benefit: (1) the benefit expires at age 86, and a credit of 4% of account value is deposited into the contract; and (2) the benefit does not have an end age, but has a cap on the payout and is paid upon the first death in a spousal situation. Both benefits have age limitations. This benefit is paid in addition to any other death benefits paid under the contract.

The GMAB, offered in the Company’s Capital Preservation Plus contract rider, is a living benefit that provides the contractholder with a guaranteed return of premium, adjusted proportionately for withdrawals, after a specified period of time (5, 7 or 10 years) selected by the contractholder at the issuance of the variable annuity contract. In some cases, the contractholder also has the option, after a specified period of time, to drop the rider and continue the variable annuity contract without the GMAB. In general, the GMAB requires a minimum allocation to guaranteed term options or adherence to limitations required by an approved asset allocation strategy.

The GMIB is a living benefit that provides the contractholder with a guaranteed annuitization value. The GMIB types are:

• Ratchet—provides an annuitization value equal to the greater of account value, net premiums or the highest one-year anniversary account value (prior to age 86) adjusted for withdrawals.

• Rollup—provides an annuitization value equal to the greater of account value and premiums adjusted for withdrawals accumulated at 5% compound interest up to the earlier of age 86 or 200% of adjusted premiums.

• Combo—provides an annuitization value equal to the greater of account value, ratchet GMIB benefit or rollup GMIB benefit.

F-42

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

See Note 5 for a complete description of the Company’s hybrid GMAB/GLWB offered through its CPPLI contract rider. All GMAB contracts with the hybrid GMAB/GLWB rider are included with GMAB contracts in the following tables.

The following table summarizes the account values and net amount at risk, net of reinsurance, for variable annuity contracts with guarantees invested in both general and separate accounts as of December 31:

	2006					2005
(in millions)	Account value		Net amount at risk1		Wtd. avg. attained age	Account value		Net amount at risk1		Wtd. avg. attained age
GMDB:
Return of premium	$	9,243.7	$	17.1	60	$	9,272.7	$	32.5	60
Reset		17,752.7		26.0	63		17,130.4		61.8	63
Ratchet		13,651.6		17.4	65		11,233.2		31.6	65
Rollup		568.1		5.7	70		629.1		8.5	69
Combo		2,588.7		14.9	68		2,530.6		22.3	68
Subtotal		43,804.8		81.1	64		40,796.0		156.7	64
Earnings enhancement		477.8		41.1	61		418.5		27.6	61
Total—GMDB	$	44,282.6	$	122.2	63	$	41,214.5	$	184.3	63
GMAB2:
5 Year	$	2,131.1	$	0.1	N/A	$	1,041.8	$	0.5	N/A
7 Year		1,865.7		0.1	N/A		1,103.5		0.2	N/A
10 Year		784.0		—	N/A		595.5		0.1	N/A
Total—GMAB	$	4,780.8	$	0.2	N/A	$	2,740.8	$	0.8	N/A
GMIB3:
Ratchet	$	450.6	$	—	N/A	$	444.7	$	—	N/A
Rollup		1,187.1		—	N/A		1,189.3		—	N/A
Combo		0.5		—	N/A		0.5		—	N/A
Total—GMIB	$	1,638.2	$	—	N/A	$	1,634.5	$	—	N/A
GLWB3:
Lifetime Income (L.INC)	$	993.8	$	—	N/A	$	—	$	—	N/A
Total—GLWB	$	993.8	$	—	N/A	$	—	$	—	N/A

¹ Net amount at risk is calculated on a seriatum basis and equals the respective guaranteed benefit less the account value (or zero if the account value exceeds the guaranteed benefit). As it relates to GMIB, net amount at risk is calculated as if all policies were eligible to annuitize immediately, although all GMIB options have a waiting period of at least 7 years from issuance, with the earliest annuitizations beginning in 2006.

² GMAB contracts with the hybrid GMAB/GLWB rider had account values of $2.95 billion and $939.1 million as of December 31, 2006 and 2005, respectively.

³ The weighted average period remaining until expected annuitization is not meaningful and has not been presented because there is currently no material GMIB exposure.

F-43

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The following table is a rollforward of the liabilities for guarantees on variable annuity contracts reflected in the Company’s general account for the years indicated:

(in millions)	GMDB			GMAB			GMIB		GLWB		Total
Balance as of December 31, 2004	$	23.7		$	23.1		$	0.8	$	—	$	47.6
Expense provision		33.0			—			0.4		—		33.4
Net claims paid		(29.5	)		—			—		—		(29.5	)
Value of new business sold		—			54.0			—		—		54.0
Change in fair value		—			(9.2	)		—		—		(9.2	)
Balance as of December 31, 2005		27.2			67.9			1.2		—		96.3
Expense provision		32.9			—			—		0.3		33.2
Net claims paid		(30.5	)		—			—		—		(30.5	)
Value of new business sold		—			95.2			—		—		95.2
Change in fair value		—			(46.8	)		—		—		(46.8	)
Balance as of December 31, 2006	$	29.6		$	116.3		$	1.2	$	0.3	$	147.4

The following table summarizes account balances of contracts with guarantees that were invested in separate accounts as of December 31:

(in millions)	2006		2005
Mutual funds:
Bond	$	4,499.2	$	3,899.8
Domestic equity		30,084.2		28,344.2
International equity		3,446.8		2,188.8
Total mutual funds		38,030.2		34,432.8
Money market funds		1,429.1		1,371.4
Total	$	39,459.3	$	35,804.2

The Company’s GMDB claim reserves are determined by estimating the expected value of death benefits on contracts that trigger a policy benefit and recognizing the excess ratably over the accumulation period based on total expected assessments. GMIB claim reserves are determined each period by estimating the expected value of annuitization benefits in excess of the projected account balance at the date of annuitization and recognizing the excess ratably over the accumulation period based on total assessments. The Company regularly evaluates its GMDB and GMIB claim reserve estimates and adjusts the additional liability balances as appropriate, with a related charge or credit to other benefits and claims in the period of evaluation if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used in calculating GMIB claim reserves are consistent with those used for calculating GMDB claim reserves. In addition, the calculation of GMIB claim reserves assumes benefit utilization ranges from a low of 3% when the contractholder’s annuitization value is at least 10% in the money to 100% utilization when the contractholder is 90% or more in the money.

In accordance with SOP 03-01, GLWB claim reserves for the L.INC rider are determined each period by estimating the expected value of withdrawal benefits in excess of the projected account balance and recognizing such potential additional liabilities of the Company as a benefit reserve expense ratably over the accumulation period. The Company periodically evaluates estimates used and adjusts the additional liability balance as appropriate, with a related charge or credit to life insurance and annuity benefits in the period of evaluation if actual experience or other evidence suggests that earlier assumptions should be revised.

F-44

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The following assumptions and methodology were used to determine the GMDB claim reserves as of December 31, 2006 and 2005:

• Data used was based on a combination of historical numbers and future projections involving 50 probabilistically generated economic scenarios

• Mean gross equity performance—8.1%

• Equity volatility—18.7%

• Mortality—100% of Annuity 2000 table

• Asset fees—equivalent to mutual fund and product loads

• Discount rate—8.0%

Lapse rate assumptions vary by duration as shown below:

Duration (years)	1		2		3		4		5		6		7		8		9		10+
Minimum	4.00	%	5.00	%	6.00	%	7.00	%	8.00	%	9.50	%	10.00	%	11.00	%	14.00	%	14.00	%
Maximum	4.00	%	5.00	%	6.00	%	7.00	%	35.00	%	35.00	%	23.00	%	35.00	%	35.00	%	23.00	%

GMABs and hybrid GMABs/GLWBs are considered embedded derivatives under current accounting guidance, resulting in the related liabilities being separated from the host insurance product and recognized at fair value, with changes in fair value reported in earnings, and therefore, excluded from the SOP 03-1 policy benefits.

(11) Short-Term Debt

The following table summarizes short-term debt as of December 31:

(in millions)	2006		2005
$800.0 million commercial paper program	$	—	$	134.7
$10.0 million line of credit		10.0		10.0
$350.0 million securities lending program facility		75.2		75.0
$250.0 million securities lending program facility		—		32.6
Total short-term debt	$	85.2	$	252.3

The Company has available as a source of funds a $1.00 billion revolving variable rate credit facility entered into by NFS, NLIC and NMIC with a group of national financial institutions. The facility provides for several and not joint liability with respect to any amount drawn by any party. The facility provides covenants, including, but not limited to, requirements that the Company maintain consolidated tangible net worth, as defined, in excess of $2.60 billion and that NLIC maintain statutory surplus, as defined, in excess of $1.67 billion. As of December 31, 2006, the Company and NLIC were in compliance with all covenants. The Company had no amounts outstanding under this agreement as of December 31, 2006 and 2005. NLIC also has an $800.0 million commercial paper program and is required to maintain an available credit facility equal to 50% of any amounts outstanding under the commercial paper program. Therefore, borrowing capacity under the aggregate $1.00 billion revolving credit facility is reduced by 50% of any amounts outstanding under the commercial paper program. NLIC had no commercial paper outstanding at December 31, 2006 and $134.7 million outstanding at December 31, 2005 at a weighted average effective interest rate of 4.22%.

F-45

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

In addition, the Company has a majority-owned subsidiary that has available an annually renewable, 364-day, $10.0 million variable rate line of credit agreement with a single financial institution. The line of credit is guaranteed by NFS and is included in the consolidated balance sheets. The majority-owned subsidiary had $10.0 million outstanding on that line of credit as of December 31, 2006 and 2005 at a weighted average effective interest rate of 5.29% in 2006 and 4.35% in 2005.

NLIC has entered into an agreement with its custodial bank to borrow against the cash collateral that is posted in connection with its securities lending program. This is an uncommitted facility contingent on the liquidity of the securities lending program. The borrowing facility was established to fund commercial mortgage loans that were originated with the intent of sale through securitization. The maximum amount available under the agreement is $350.0 million. The borrowing rate on this program is equal to one-month U.S. LIBOR. NLIC had $75.2 million and $75.0 million outstanding under this agreement as of December 31, 2006 and 2005, respectively. As of December 31, 2006, the Company had not provided any guarantees on such borrowings, either directly or indirectly.

The Company paid interest on short-term debt totaling $12.3 million, $11.8 million and $3.6 million in 2006, 2005 and 2004, respectively.

(12) Long-Term Debt

The following table summarizes long-term debt as of December 31:

(in millions)	2006		2005
$300.0 million principal, 8.00% senior notes, due March 1, 2027	$	298.6	$	298.5
$300.0 million principal, 6.25% senior notes, due November 15, 2011		299.2		299.1
$300.0 million principal, 5.90% senior notes, due July 1, 2012		299.0		298.8
$200.0 million principal, 5.625% senior notes, due February 13, 2015		199.2		199.1
$200.0 million principal, 5.10% senior notes, due October 1, 2015		199.4		199.4
$100.0 million principal, 7.899% junior subordinated debentures issued to a related party, due March 1, 2037		103.1		103.1
Total long-term debt	$	1,398.5	$	1,398.0

The $300.0 million principal of 8.00% senior notes due March 1, 2027 were issued in March 1997 and are redeemable, in whole or in part, at the option of NFS at any time on or after March 1, 2007 at scheduled redemption premiums through March 1, 2016, and, thereafter, at 100% of the principal amount thereof plus, in each case, accrued and unpaid interest. The $300.0 million principal of 6.25% senior notes due November 15, 2011 were issued in November 2001 and are not redeemable prior to their maturity date. The $300.0 million principal of 5.90% senior notes due July 1, 2012, issued in June 2002, and the $200.0 million principal of 5.625% senior notes due February 13, 2015, issued in February 2003, are redeemable, in whole or in part, at the option of NFS at any time or from time to time at a redemption price equal to the greater of (1) 100% of the aggregate principal amount of the notes to be redeemed or (2) the sum of the present value of the remaining scheduled payments of principal and interest on the notes, discounted to the redemption date on a semi-annual basis at a prevailing U.S. Treasury rate plus 20 basis points, together in each case with accrued interest payments to the redemption date. The $200.0 million principal of 5.10% senior notes due October 1, 2015 were issued in September 2005 and are redeemable, in whole or in part, at the option of NFS at any time or from time to time at a redemption price equal to the greater of (1) 100% of the aggregate principal amount of the notes to be

F-46

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

redeemed or (2) the sum of the present value of the remaining scheduled payments of principal and interest on the notes, discounted to the redemption date on a semi-annual basis at a prevailing U.S. Treasury rate plus 15 basis points, together in each case with accrued interest payments to the redemption date.

The terms of each series of senior notes contain various restrictive business and financial covenants, including limitations on the disposition of subsidiaries. As of December 31, 2006 and 2005, the Company was in compliance with all such covenants.

On March 11, 1997, Trust I sold, in a public offering, $100.0 million principal of 7.899% capital securities, representing preferred undivided beneficial interests in the assets of Trust I. This sale generated net proceeds of $98.3 million. Concurrent with the sale of the capital securities, NFS sold to Trust I $103.1 million principal of its 7.899% junior subordinated debentures due March 1, 2037. The junior subordinated debentures are the sole assets of Trust I and are redeemable by NFS in whole at any time or in part from time to time at par plus an applicable make-whole premium. The related capital securities will mature or be called simultaneously with the junior subordinated debentures and have a liquidation value of $1,000 per capital security. The capital securities are fully and unconditionally guaranteed by NFS, and there are no related sinking fund requirements. Distributions on the capital securities are cumulative and payable semi-annually in arrears.

On September 28, 2005, NFS redeemed all of its outstanding 7.10% junior subordinated debentures due October 31, 2028 (the Debt Securities), which were held by Nationwide Financial Services Capital Trust II (Trust II). In addition, all of the related outstanding 7.10% trust preferred securities and 7.10% trust common securities of Trust II were redeemed on that date. The aggregate principal amount redeemed of the Debt Securities was $206.2 million, plus $2.3 million in accrued interest through the redemption date. The Debt Securities were originally issued on October 19, 1998 and, in accordance with their terms, became subject to optional redemption by NFS on or after October 19, 2003. Pursuant to the terms of its Amended and Restated Declaration of Trust, Trust II was required to use the proceeds it received from the redemption of the Debt Securities to redeem its trust preferred and trust common securities on the same day. As a result of these transactions, NFS incurred a non-cash charge of $21.7 million ($14.1 million, net of taxes) during the year ended December 31, 2005. The non-cash charge reflects the accelerated amortization of unamortized debt issuance costs, including a deferred loss on previous hedging transactions. These amounts otherwise would have been recognized through 2028.

The Company made interest payments on the senior notes of $82.0 million in 2006, $71.7 million in 2005 and $71.7 million in 2004.

Distributions related to junior subordinated debentures were classified as interest expense in the consolidated statements of income. The Company made distributions of $8.1 million, $19.0 million and $22.8 million related to junior subordinated debentures in 2006, 2005 and 2004, respectively.

(13) Federal Income Taxes

NFS’ acquisition of NFN in 2002 reduced Nationwide Corp.’s economic ownership in the Company from 79.8% to 63.0%. Therefore, NFS and its subsidiaries no longer qualify to be included in the NMIC consolidated federal income tax return. The members of the NMIC consolidated federal income tax return group participated in a tax sharing arrangement, which provided, in effect, for each member to bear essentially the same federal income tax liability as if separate tax returns were filed.

Under IRC regulations, NFS and its subsidiaries cannot file a life/non-life consolidated federal income tax return until five full years following NFS’ departure from the NMIC consolidated federal income tax return

F-47

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

group. Therefore, NFS and its direct non-life insurance company subsidiaries will file a consolidated federal income tax return; NLIC and Nationwide Life and Annuity Insurance Company (NLAIC) will file a consolidated federal income tax return; the direct non-life insurance companies under NLIC will file separate federal income tax returns; NLICA and its direct life insurance company subsidiaries will file a consolidated federal income tax return; and the direct non-life insurance companies under NLICA will file a consolidated federal income tax return, until 2008, when NFS will become eligible to file a single life/non-life consolidated federal income tax return with all of its subsidiaries.

The following table summarizes the tax effects of temporary differences that give rise to significant components of the net deferred tax liability as of December 31:

(in millions)	2006			2005
Deferred tax assets:
Future policy benefits	$	735.4		$	776.9
Other		186.5			258.9
Gross deferred tax assets		921.9			1,035.8
Less valuation allowance		(23.7	)		(31.7	)
Deferred tax assets, net of valuation allowance		898.2			1,004.1
Deferred tax liabilities:
Deferred policy acquisition costs		1,014.6			956.9
Value of business acquired		137.4			157.4
Other		256.8			337.0
Gross deferred tax liabilities		1,408.8			1,451.3
Net deferred tax liability	$	510.6		$	447.2

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the total gross deferred tax assets will not be realized. Future taxable amounts or recovery of federal income taxes paid within the statutory carryback period can offset nearly all future deductible amounts. Because it is more likely than not that certain deferred tax assets will not be realized, the Company established valuation allowances of $23.7 million, $31.7 million and $27.1 million as of December 31, 2006, 2005 and 2004, respectively.

The Company’s current federal income tax (asset) liability was $(20.8) million and $27.3 million as of December 31, 2006 and 2005, respectively.

Through June 2006, the Company’s federal income tax returns for tax years 2000-2002 were under IRS examination pursuant to a routine audit. In accordance with its regular practice, management established tax reserves representing its best estimate of additional amounts the Company could be required to pay if certain positions it had taken were challenged and ultimately denied by the IRS with respect to these tax years. These reserves are reviewed regularly and are adjusted as events occur that management believes impacts the Company’s liability for additional taxes, such as lapsing of applicable statutes of limitations; conclusion of tax audits or substantial agreement on the deductibility/non-deductibility of uncertain items; additional exposure based on current calculations; identification of new issues; release of administrative guidance; or rendering of a court decision affecting a particular tax issue. A significant component of the Company’s tax reserve as of December 31, 2005 was related to the separate account dividends received deduction (DRD).

F-48

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

In July 2006, the Company reached substantial agreement with the IRS on all open issues for tax years 2000-2002, including issues related to the DRD. Accordingly, the Company revised its estimate of amounts that may be due in connection with certain tax positions, including the DRD, for all open tax years. As a result of the revised estimate, $114.2 million of tax reserves were released into earnings during the quarter ended June 30, 2006.

During the third quarter of 2006, the Company recorded $8.3 million of net federal income tax expense adjustments primarily related to differences between the 2005 estimated tax liability and the amounts reported on the Company’s 2005 tax returns.

During the third quarter of 2005, the Company refined its separate account DRD estimation process. As a result, the Company identified and recorded additional federal income tax benefits and recoverables in the amount of $42.6 million related to all tax years (2000 – 2005) that were open at that time. In addition, the Company recorded $5.6 million of net benefit adjustments primarily related to differences between the 2004 estimated tax liability and the amounts reported on the Company’s 2004 tax returns.

The following table summarizes the federal income tax expense attributable to income from continuing operations for the years ended December 31:

(in millions)	2006			2005		2004
Current	$	(34.0	)	$	105.6	$	210.6
Deferred		99.1			27.1		(43.2	)
Federal income tax expense	$	65.1		$	132.7	$	167.4

Total federal income tax expense differs from the amount computed by applying the U.S. federal income tax rate to income from continuing operations before federal income taxes as follows for the years ended December 31:

	2006					2005					2004
(dollars in millions)	Amount			%		Amount			%		Amount			%
Computed (expected) tax expense	$	272.6		35.0		$	264.6		35.0		$	236.3		35.0
Tax exempt interest and DRD		(73.0	)	(9.4	)		(115.4	)	(15.3	)		(50.6	)	(7.5	)
Reserve release		(114.2	)	(14.7	)		—		—			—		—
Other, net		(20.3	)	(2.5	)		(16.5	)	(2.1	)		(18.3	)	(2.7	)
Total	$	65.1		8.4		$	132.7		17.6		$	167.4		24.8

The Jobs Creation Act of 2004 suspends policyholder surplus accounts (PSA) during 2005 and 2006 and provides that direct and indirect distributions from the PSA during any taxable year beginning after 2004 and before 2007 be treated as zero. Because NLIC had the ability and intent to distribute this PSA balance to its shareholder during the noted period, the potential tax liability was eliminated as of December 31, 2004. The Jobs Creation Act of 2004 had no other significant impact on the Company’s tax position.

Total federal income taxes paid were $0.3 million, $236.0 million and $149.7 million during the years ended December 31, 2006, 2005 and 2004, respectively.

As of December 31, 2006, the Company had $26.0 million of net operating loss carryforwards related to non-life losses that are limited in their ability to offset life earnings that begin to expire in 2021. As of December 31, 2006, the Company also had $35.5 million of capital loss carryforwards that will begin to expire in 2010 if unutilized. The Company expects to fully utilize these carryforward amounts.

F-49

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

(14) Shareholders’ Equity, Regulatory Risk-Based Capital and Dividend Restrictions

Overview

The Board of Directors of the Company has the authority to issue 50.0 million shares of preferred stock without further action of the shareholders. Preferred stock may be issued in one or more classes with full, special, limited or no voting powers; designations, preferences and relative, participating, optional or other special rights; and qualifications and limitations or restrictions as stated in any resolution adopted by the Board of Directors of the Company issuing any class of preferred stock. No shares of preferred stock have been issued or are outstanding.

The holders of Class A common stock are entitled to one vote per share. The holders of Class B common stock are entitled to ten votes per share. Class A common stock has no conversion rights. Class B common stock is convertible into Class A common stock, in whole or in part, at any time and from time to time at the option of the holder, on the basis of one share of Class A common stock for each share of Class B common stock converted. If at any time after the initial issuance of shares of Class A common stock the number of outstanding shares of Class B common stock falls below 5% of the aggregate number of issued and outstanding shares of common stock, then each outstanding share of Class B common stock shall automatically convert into one share of Class A common stock. In the event of any sale or transfer of shares of Class B common stock to any person or persons other than NMIC or its affiliates, such shares of Class B common stock so transferred shall be automatically converted into an equal number of shares of Class A common stock. Cash dividends of $0.92, $0.76 and $0.72 per common share were declared during 2006, 2005 and 2004, respectively.

Share Repurchase Program

On August 3, 2005, the Company’s Board of Directors approved a stock repurchase program (the Program). The Program authorizes the Company to repurchase up to an aggregate of $300.0 million in value of shares of its common stock in the open market, in block trades or otherwise, and through privately negotiated transactions. On August 2, 2006, the Board of Directors extended the approval of the Program through December 2007 and authorized repurchases of up to $200.0 million in value of shares of the Company’s common stock in addition to the $300.0 million previously authorized. On February 21, 2007, the Board of Directors further extended the approval of the Program through December 2008 and authorized repurchases of up to $450.0 million in value of shares of the Company’s common stock in addition to the $500.0 million total previously authorized. Repurchases under the program are to be made in compliance with all applicable laws and regulations, including SEC rules. All shares repurchased under the Program are classified as treasury stock in the consolidated balance sheets. The Program may be superseded or discontinued at any time.

During the year ended December 31, 2006, the Company repurchased 4,813,078 shares of its Class A common stock for an aggregate of $216.3 million at an average price per share of $44.93. Included in the total shares repurchased were 2,790,698 shares repurchased under an accelerated share repurchase agreement (ASR) for $124.3 million at an average price per share of $44.55.

The Company entered into the ASR with UBS AG, London Branch (UBS) during the quarter ended March 31, 2006. Under the ASR, the Company repurchased shares immediately from UBS. Simultaneously, the Company entered into a forward contract with UBS indexed to the number of shares repurchased. Under the terms of the forward contract, the Company was required to pay a per share price adjustment based on the difference between the average of daily volume weighted prices during the duration of the ASR and the initial reference price. The ASR terminated during October 2006, at which time the Company settled the forward contract for $4.3 million in cash.

F-50

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

Since the Program’s inception, the Company has repurchased a total of 6,052,228 shares of its Class A common stock for an aggregate of $267.6 million at an average price per share of $44.22, including the impact of the per share price adjustment described above.

In addition to the Class A share repurchases described above, NFS and Nationwide Corp. entered into a Share Purchase Agreement on November 27, 2006. Pursuant to this agreement, NFS purchased 3,855,050 shares of its Class B common stock held by Nationwide Corp. for $200.0 million at an average price per share of $51.88 (the five-day average closing price on the New York Stock Exchange for the period beginning November 27, 2006 and ending December 1, 2006). The transaction closed on December 4, 2006. Upon the repurchase, the Class B common stock converted automatically to Class A common stock. The Company retained these shares in treasury for future issuance.

The Company’s management will determine the timing and amount of any additional repurchases based upon its evaluation of market conditions, share price and other factors. The Company anticipates that it will continue to fund the Program using cash flows from operating activities.

Regulatory Risk-Based Capital

Each insurance company’s state of domicile imposes minimum risk-based capital (RBC) requirements that were developed by the National Association of Insurance Commissioners (NAIC). The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of total adjusted capital, as defined by the NAIC, to authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. Each of the Company’s insurance company subsidiaries exceeded the minimum RBC requirements for all periods presented herein.

Dividend Restrictions

As an insurance holding company, NFS’ ability to meet debt service obligations and pay operating expenses and dividends depends primarily on the receipt of sufficient funds from its primary operating subsidiary, NLIC. The inability of NLIC to pay dividends to NFS in an amount sufficient to meet debt service obligations and pay operating expenses and dividends would have a material adverse effect on the Company. The payment of dividends by NLIC is subject to restrictions set forth in the insurance laws and regulations of the State of Ohio, its domiciliary state. The State of Ohio insurance laws require Ohio-domiciled life insurance companies to seek prior regulatory approval to pay a dividend or distribution of cash or other property if the fair market value thereof, together with that of other dividends or distributions made in the preceding 12 months, exceeds the greater of (1) 10% of statutory-basis policyholders’ surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. During the year ended December 31, 2006, NLIC paid dividends of $375.0 million to NFS. NLIC’s statutory capital and surplus as of December 31, 2006 was $2.68 billion, and statutory net income for 2006 was $537.5 million. As of January 1, 2007, NLIC could pay dividends to NFS totaling $162.5 million without obtaining prior approval. As of March 1, 2007, NLIC will be able to pay dividends to NFS totaling $232.5 million upon providing prior notice to the ODI. On February 21, 2007, NLIC declared an ordinary dividend of $232.5 million and an extraordinary dividend of $242.5 million, both payable to NFS in March 2007. NLIC will provide notice to the ODI of the ordinary dividend and seek prior approval from the ODI of the extraordinary dividend before paying these dividends to NFS.

F-51

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The State of Ohio insurance laws also require insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. Earned surplus is defined under the State of Ohio insurance laws as the amount equal to the Company’s unassigned funds as set forth in its most recent statutory financial statements, including net unrealized capital gains and losses or revaluation of assets. Additionally, following any dividend, an insurer’s policyholder surplus must be reasonable in relation to the insurer’s outstanding liabilities and adequate for its financial needs. The payment of dividends by NLIC may also be subject to restrictions set forth in the insurance laws of the State of New York that limit the amount of statutory profits on NLIC’s participating policies (measured before dividends to policyholders) that can inure to the benefit of the Company and its stockholders.

The ability of NLICA to pay dividends to NFS is subject to regulation under Pennsylvania insurance law. Under Pennsylvania insurance laws, unless the PID either approves or does not disapprove payment within 30 days after being notified, NLICA may not pay any cash dividends or other non-stock distributions to NFS during any 12-month period if the total payments exceed the greater of (1) 10% of statutory-basis policyholders’ surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer for the prior year. NLICA paid a dividend of $110.0 million to NFS in 2006. The statutory capital and surplus of NLICA as of December 31, 2006 was $654.3 million, and statutory net income for the year ended December 31, 2006 was $95.3 million. As of January 1, 2007, NLICA could not pay any dividends to NFS without obtaining prior approval.

NFS currently does not expect such regulatory requirements to impair the ability of its insurance company subsidiaries to pay sufficient dividends in order for NFS to have the necessary funds available to meet its obligations.

F-52

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

Comprehensive Income

The Company’s comprehensive income includes net income and certain items that are reported directly within separate components of shareholders’ equity that are not recorded in net income (other comprehensive income or loss).

The following table summarizes the Company’s other comprehensive loss, before and after federal income tax benefit, for the years ended December 31:

(in millions)	2006			2005			2004
Net unrealized losses on securities available-for-sale arising during the period:
Net unrealized losses before adjustments	$	(194.3	)	$	(789.2	)	$	(138.4	)
Net adjustment to DAC		40.5			194.7			98.0
Net adjustment to VOBA		(13.4	)		12.0			5.4
Net adjustment to future policy benefits and claims		23.1			18.9			(9.2	)
Net adjustment to policyholder dividend obligation		14.7			34.7			(23.2	)
Related federal income tax benefit		45.2			185.1			23.5
Net unrealized losses		(84.2	)		(343.8	)		(43.9	)
Reclassification adjustment for net realized losses (gains) on securities available-for-sale realized during the period:
Net unrealized losses (gains)		11.5			(32.3	)		10.0
Related federal income tax (benefit) expense		(4.0	)		11.3			(3.5	)
Net reclassification adjustment		7.5			(21.0	)		6.5
Other comprehensive loss on securities available-for-sale		(76.7	)		(364.8	)		(37.4	)
Accumulated net holding (losses) gains on cash flow hedges:
Unrealized holding (losses) gains		(0.2	)		51.2			(54.3	)
Related federal income tax benefit (expense)		0.1			(17.9	)		19.0
Other comprehensive (loss) income on cash flow hedges		(0.1	)		33.3			(35.3	)
Unrecognized amounts on pension plans:
Net unrecognized amounts		12.3			—			—
Related federal income tax expense		(4.3	)		—			—
Other comprehensive income on unrecognized pension amounts		8.0			—			—
Total other comprehensive loss	$	(68.8	)	$	(331.5	)	$	(72.7	)

Adjustments for net realized gains and losses on the ineffective portion of cash flow hedges were immaterial during the years ended December 31, 2006, 2005 and 2004.

(15) Earnings Per Share

Basic earnings per share represent the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share represent the amount of earnings for the period available to each share of common stock outstanding during the reporting period adjusted for the potential issuance of common shares for stock options, if dilutive.

F-53

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The following table presents information relating to the Company’s calculations of basic and diluted earnings per share (EPS) for the years ended December 31:

	2006						2005									2004
(in millions, except per share amounts)	Amount		Basic EPS		Diluted EPS		Amount			Basic EPS			Diluted EPS			Amount			Basic EPS			Diluted EPS
Income from continuing operations	$	713.8	$	4.76	$	4.74	$	623.4		$	4.08		$	4.06		$	507.7		$	3.34		$	3.32
Discontinued operations, net of taxes		—		—		—		(24.7	)		(0.16	)		(0.16	)		(2.3	)		(0.02	)		(0.02	)
Cumulative effect of adoption of accounting principles, net of taxes		—		—		—		—			—			—			(3.4	)		(0.02	)		(0.02	)
Net income	$	713.8	$	4.76	$	4.74	$	598.7		$	3.92		$	3.90		$	502.0		$	3.30		$	3.28
Weighted average common shares outstanding—basic		149.9						152.9									152.1
Dilutive effect of stock options		0.8						0.7									0.8
Weighted average common shares outstanding—diluted		150.7						153.6									152.9

(16) Employee Benefit Plans

Defined Benefit Plans

The Company, excluding NFN, and certain affiliated companies participate in a qualified defined benefit pension plan sponsored by NMIC. This plan covers all employees of participating companies who have completed at least one year of service. Plan contributions are invested in a group annuity contract issued by NLIC. All participants are eligible for benefits based on an account balance feature. Participants last hired before 2002 are eligible for benefits based on the highest average annual salary of a specified number of consecutive years of the last ten years of service, if such benefits are of greater value than the account balance feature. The Company funds pension costs accrued for direct employees plus an allocation of pension costs accrued for employees of affiliates whose work benefits the Company. A separate non-qualified defined benefit pension plan sponsored by NMIC covers certain executives with at least one year of service. The Company’s portion of expense relating to the plans sponsored by NMIC was $22.3 million, $17.9 million and $14.5 million for the years ended December 31, 2006, 2005 and 2004, respectively.

NFN also has separate qualified and non-qualified defined benefit pension plans (the NFN pension plans). The NFN pension plans generally cover all NFN employees of participating companies who have completed at least one year of service. All participants are eligible for benefits based on an account balance feature. Participants hired before 2002 are eligible for benefits based on the highest average annual salary of a specified number of consecutive years of the last ten years of service, if such benefits are of greater value than the account balance feature. Plan contributions are invested in a group annuity contract issued by NLICA. The Company’s portion of income relating to the NFN pension plans was $0.1 million, $1.4 million and $2.0 million for the years ended December 31, 2006, 2005 and 2004, respectively.

See Note 17 for more information on group annuity contracts issued by the Company for various employee benefit plans sponsored by NMIC or its affiliates.

F-54

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The following table summarizes information regarding the funded status of the NFN pension plans (all are U.S. plans), as of December 31:

(in millions)	2006			2005
Change in benefit obligation:
Benefit obligation at beginning of year	$	102.9		$	102.5
Service cost		2.6			2.4
Interest cost		4.8			4.8
Actuarial loss		0.1			3.4
Benefits paid		(9.4	)		(10.2	)
Plan amendment1		0.3			—
Benefit obligation at end of year		101.3			102.9
Change in plan assets:
Fair value of plan assets at beginning of year		135.8			136.9
Actual return on plan assets		17.5			8.2
Employer contributions		2.8			0.9
Benefits paid		(9.4	)		(10.2	)
Fair value of plan assets at end of year		146.7			135.8
Funded status	$	45.4		$	32.9
Amounts not yet reflected in net periodic benefit cost and included in AOCI:
Unrecognized prior service cost1	$	(0.3	)
Unrecognized net gain		12.6
Amount included in AOCI		12.3
Cumulative employer contributions in excess of net periodic benefit cost		33.1
Net amount recognized on balance sheet	$	45.4
Accumulated benefit obligation	$	94.1		$	96.9

¹ Represents the increase in the projected benefit obligation related to the application of the Pension Protection Act effective December 31, 2006.

The following table summarizes the weighted average assumptions used to calculate the benefit obligation of the NFN pension plans as of the December 31 measurement date:

	2006		2005
Discount rate	5.25	%	4.75	%
Rate of increase in future compensation levels	4.75	%	4.25	%

The following table summarizes the asset allocation for the NFN qualified pension plan at the end of 2006 and 2005 and the target allocation for 2007, by asset category:

	Percentage of plan assets				Target allocation percentage
Asset Category	2006		2005		2007
Equity securities	67	%	68	%	62 - 68%
Debt securities	33	%	32	%	32 - 38%
Other	—		—		0 - 10%
Total	100	%	100	%

F-55

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The NFN pension plans employ a total return investment approach using a mix of equities and fixed income investments to maximize the long-term return of plan assets in exchange for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities and funded status. On a quarterly basis, the portfolio of investments within the annuity contract issued by NFN is analyzed in light of current market conditions and rebalanced to match the target allocations.

The NFN pension plans employ a prospective building block approach in determining the expected long-term rate of return on plan assets. This process is integrated with the determination of other economic assumptions such as discount rate and salary scale. Historical markets are studied, and long-term historical relationships between equities and fixed income investments are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run (called a risk premium). Historical risk premiums are used to develop expected real rates of return for each asset sub-class. The expected real rates of return, reduced for investment expenses, are applied to the target allocation of each asset sub-class to produce an expected real rate of return for the target portfolio. This expected real rate of return will vary by plan and will change when the plan’s target investment portfolio changes. Current market factors such as inflation and interest rates are incorporated into the process. For a given measurement date, the discount rate is set by reference to the yield on high-quality corporate bonds to approximate the rate at which plan benefits could effectively be settled. The historical real rate of return is subtracted from these bonds to generate an assumed inflation rate. The expected long-term rate of return on plan assets is the assumed inflation rate plus the expected real rate of return. This process effectively sets the expected return for the plan’s portfolio at the yield for the reference bond portfolio, adjusted for expected risk premiums of the target asset portfolio. Given the prospective nature of this calculation, short-term fluctuations in the market do not impact the expected risk premiums. However, as the yield for the reference bond fluctuates, the assumed inflation rate and the expected long-term rate are adjusted in tandem.

Effective December 31, 2005, the historical risk premiums and expected real rates of return were re-evaluated affecting December 31, 2005 benefit obligations and 2006 costs. For benefits obligations, a lower real rate of return on corporate bonds led to a higher implied inflation rate and a higher rate of future compensation increase, which was 4.25% at December 31, 2005.

In addition, the Company and certain affiliated companies, including NFN, participate in life and health care defined benefit plans sponsored by NMIC for qualifying retirees. Postretirement life and health care benefits are contributory. The level of contribution required by a qualified retiree depends on the retiree’s years of service and date of hire. In general, postretirement benefits are available to full-time employees who are credited with 120 months of retiree life and health service. Postretirement health care benefit contributions are adjusted annually and contain cost-sharing features such as deductibles and coinsurance. In addition, there are caps on the Company’s portion of the per-participant cost of the postretirement health care benefits. The Company’s policy is to fund the cost of health care benefits in amounts determined at the discretion of management. Plan assets are invested primarily in group annuity contracts issued by NLIC. The Company’s portion of expense relating to these plans was immaterial for the years ended December 31, 2006, 2005 and 2004.

Defined Contribution Plans

NMIC sponsors a defined contribution retirement savings plan covering substantially all employees of the Company. Employees may make salary deferral contributions of up to 80%. With the exception of NFN agents, salary deferrals of up to 6% are subject to a 50% Company match. The Company’s expense for contributions to these plans was $7.4 million, $7.3 million and $7.0 million for the years ended December 31, 2006, 2005 and 2004, respectively.

F-56

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

NFN also provides a funded noncontributory defined contribution plan that covers substantially all of its agents. The Company’s expense for contributions to this plan was $0.9 million, $0.6 million and $0.7 million for the years ended December 31, 2006, 2005 and 2004, respectively.

(17) Related Party Transactions

The Company has entered into significant, recurring transactions and agreements with NMIC, other affiliates and subsidiaries as a part of its ongoing operations. These include annuity and life insurance contracts, office space leases, and agreements related to reinsurance, cost sharing, administrative services, marketing, intercompany loans, intercompany repurchases, cash management services and software licensing. Measures used to allocate expenses among companies include individual employee estimates of time spent, special cost studies, the number of full-time employees, commission expense and other methods agreed to by the participating companies and that are within industry guidelines and practices.

In addition, Nationwide Services Company, LLC (NSC), a subsidiary of NMIC, provides computer, telephone, mail, employee benefits administration and other services to NMIC and certain of its direct and indirect subsidiaries, including the Company, based on specified rates for units of service consumed. For the years ended December 31, 2006, 2005 and 2004, the Company made payments to NMIC and NSC totaling $264.5 million, $314.7 million and $221.7 million, respectively.

The Company has issued group annuity and life insurance contracts and performs administrative services for various employee benefit plans sponsored by NMIC or its affiliates. Total account values of these contracts were $5.64 billion and $6.61 billion as of December 31, 2006 and 2005, respectively. Total revenues from these contracts were $139.3 million, $141.9 million and $142.2 million for the years ended December 31, 2006, 2005 and 2004, respectively, and include policy charges, net investment income from investments backing the contracts and administrative fees. Total interest credited to the account balances was $111.4 million, $108.3 million and $109.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. The terms of these contracts are materially consistent with what the Company offers to unaffiliated parties who are similarly situated.

The Company leases office space from NMIC. For the years ended December 31, 2006, 2005 and 2004, the Company made lease payments to NMIC of $19.3 million, $18.7 million and $18.4 million, respectively.

NLIC has a reinsurance agreement with NMIC whereby all of NLIC’s accident and health business not ceded to unaffiliated reinsurers is ceded to NMIC on a modified coinsurance basis. Either party may terminate the agreement on January 1 of any year with prior notice. Under a modified coinsurance agreement, the ceding company retains invested assets, and investment earnings are paid to the reinsurer. Under the terms of NLIC’s agreements, the investment risk associated with changes in interest rates is borne by the reinsurer. The ceding of risk does not discharge the original insurer from its primary obligation to the policyholder. The Company believes that the terms of the modified coinsurance agreements are consistent in all material respects with what the Company could have obtained with unaffiliated parties. Revenues ceded to NMIC for the years ended December 31, 2006, 2005 and 2004 were $430.8 million, $429.5 million and $335.6 million, respectively, while benefits, claims and expenses ceded during these years were $470.4 million, $398.8 million and $336.0 million, respectively.

Funds of NWD Investment Management, Inc. (NWD), an affiliate formerly known as Gartmore Global Investments, Inc., are offered to the Company’s customers as investment options in certain of the Company’s

F-57

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

products. This arrangement is documented in agreements between NWD affiliates and the Company to govern the inclusion of NWD affiliated funds within various distribution channels of the Company. In addition, the agreements cover the payment of revenue to the Company in exchange for services that the Company provides. These services include shareholder and administrative services, record keeping, distribution and marketing support. As of December 31, 2006 and 2005, customer allocations to NWD funds totaled $24.86 billion and $20.24 billion, respectively. For the years ended December 31, 2006, 2005 and 2004, NWD paid the Company $80.3 million, $64.2 million and $55.0 million, respectively, for the distribution and servicing of these funds. In addition, the Company entered into a renewable three-year marketing and support services agreement with NWD effective June 28, 2002. Effective June 28, 2005, the Company and NWD amended the agreement to provide for an initial term of three years and sixty days from June 28, 2002. The agreement expired on August 26, 2005. Under this agreement, the Company had received a quarterly fee of $1.0 million in exchange for certain marketing and support of NWD product offerings. Effective October 1, 2005, an affiliate of NWD and the Company agreed to increase the fees paid to the Company with respect to various NWD managed money market funds on an annualized basis by 15 basis points in place of the expired marketing and support services agreement. These fees are included in the amounts disclosed above.

On November 2, 2006, NFS and NMIC announced that they were in discussions regarding the Philadelphia-based retail asset management operations of NWD. On December 21, 2006, NFS and NMIC announced that they had reached an agreement outlining the preliminary terms for NFS’ purchase of NWD. On February 2, 2007, NFS entered into a stock purchase agreement with Nationwide Corporation. Total consideration in the transaction will be $225.0 million in cash, plus the value of NWD’s tangible shareholders’ equity at closing. The transaction is expected to be completed during the second quarter of 2007 and is subject to the approval of the shareholders of the affected NWD funds to be acquired by NFS.

Under a marketing agreement with NMIC, NLIC makes payments to cover a portion of the agent marketing allowance that is paid to Nationwide agents. These costs cover product development and promotion, sales literature, rent and similar items. Payments under this agreement totaled $28.3 million, $26.5 million and $23.2 million for the years ended December 31, 2006, 2005 and 2004, respectively.

The Company also participates in intercompany repurchase agreements with affiliates whereby the seller transfers securities to the buyer at a stated value. Upon demand or after a stated period, the seller repurchases the securities at the original sales price plus interest. As of December 31, 2006 and 2005, the Company had no outstanding borrowings from affiliated entities under such agreements. During 2006, 2005 and 2004, the most the Company had outstanding at any given time was $191.5 million, $55.3 million and $227.7 million, respectively, and the amounts the Company incurred for interest expense on intercompany repurchase agreements during these years were immaterial.

The Company and various affiliates entered into agreements with Nationwide Cash Management Company (NCMC), an affiliate, under which NCMC acts as a common agent in handling the purchase and sale of short-term securities for the respective accounts of the participants. Amounts on deposit with NCMC for the benefit of the Company were $869.6 million and $673.1 million as of December 31, 2006 and 2005, respectively, and are included in short-term investments on the consolidated balance sheets.

The Company and an affiliate are currently developing a browser-based policy administration and online brokerage software application for defined benefit plans. In connection with the development of this application, the Company made net payments, which were expensed, to that affiliate related to development totaling $9.5 million, $4.1 million and $5.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.

F-58

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

Through September 30, 2002, the Company filed a consolidated federal income tax return with NMIC, as described in Note 13. Effective October 1, 2002, NFS began filing a consolidated federal tax return with its non-life insurance company subsidiaries. Total payments (from) to NMIC were $(16.3) million, $45.0 million and $37.4 million for the years ended December 31, 2006, 2005 and 2004, respectively. These payments related to tax years prior to deconsolidation.

(18) Contingencies

Legal Matters

The Company is a party to litigation and arbitration proceedings in the ordinary course of its business. It is often not possible to determine the ultimate outcome of the pending investigations and legal proceedings or to provide reasonable ranges of potential losses with any degree of certainty. Some matters, including certain of those referred to below, are in very preliminary stages, and the Company does not have sufficient information to make an assessment of the plaintiffs’ claims for liability or damages. In some of the cases seeking to be certified as class actions, the court has not yet decided whether a class will be certified or (in the event of certification) the size of the class and class period. In many of the cases, the plaintiffs are seeking undefined amounts of damages or other relief, including punitive damages and equitable remedies, which are difficult to quantify and cannot be defined based on the information currently available. The Company does not believe, based on information currently known by management, that the outcomes of such pending investigations and legal proceedings are likely to have a material adverse effect on the Company’s consolidated financial position. However, given the large and/or indeterminate amounts sought in certain of these matters and inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could have a material adverse effect on the Company’s consolidated financial results in a particular quarterly or annual period.

In recent years, life insurance companies have been named as defendants in lawsuits, including class action lawsuits relating to life insurance and annuity pricing and sales practices. A number of these lawsuits have resulted in substantial jury awards or settlements against life insurers other than the Company.

The financial services industry, including mutual fund, variable annuity, life insurance and distribution companies, has also been the subject of increasing scrutiny by regulators, legislators and the media over the past few years. Numerous regulatory agencies, including the SEC, the National Association of Securities Dealers and the New York State Attorney General, have commenced industry-wide investigations regarding late trading and market timing in connection with mutual funds and variable insurance contracts, and have commenced enforcement actions against some mutual fund and life insurance companies on those issues. The Company has been contacted by or received subpoenas from the SEC and the New York State Attorney General, who are investigating market timing in certain mutual funds offered in insurance products sponsored by the Company. The Company has cooperated with these investigations. Information requests from the New York State Attorney General and the SEC with respect to investigations into late trading and market timing were last responded to by the Company and its affiliates in December 2003 and June 2005, respectively, and no further information requests have been received with respect to these matters.

In addition, state and federal regulators have commenced investigations or other proceedings relating to compensation and bidding arrangements and possible anti-competitive activities between insurance producers and brokers and issuers of insurance products, and unsuitable sales and replacements by producers on behalf of the issuer. Also under investigation are compensation and revenue sharing arrangements between the issuers of variable insurance contracts and mutual funds or their affiliates, the use of side agreements and finite reinsurance agreements, funding agreements issued to back MTN programs, recordkeeping and retention compliance by

F-59

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

broker/dealers, and supervision of former registered representatives. Related investigations and proceedings may be commenced in the future. The Company and/or its affiliates have been contacted by or received subpoenas from state and federal regulatory agencies, state securities law regulators and state attorneys general for information relating to certain of these investigations, including those relating to compensation, revenue sharing and bidding arrangements, anti-competitive activities, unsuitable sales or replacement practices, the use of side agreements and finite reinsurance agreements, and funding agreements backing the NLIC MTN program. The Company is cooperating with regulators in connection with these inquiries and will cooperate with NMIC in responding to these inquiries to the extent that any inquiries encompass NMIC’s operations.

These proceedings are expected to continue in the future and could result in legal precedents and new industry-wide legislation, rules and regulations that could significantly affect the financial services industry, including life insurance and annuity companies. These proceedings also could affect the outcome of one or more of the Company’s litigation matters. There can be no assurance that any such litigation or regulatory actions will not have a material adverse effect on the Company in the future.

On November 15, 2006, NFS, NLIC and NRS were named in a lawsuit filed in the Untied States District Court for the Southern District of Ohio entitled Kevin Beary, Sheriff of Orange County, Florida, In His Official Capacity, Individually and On Behalf of All Others Similarly Situated v. Nationwide Life Insurance Co., Nationwide Retirement Solutions, Inc. and Nationwide Financial Services, Inc. The plaintiff seeks to represent a class of all sponsors of 457(b) deferred compensation plans in the United States that had variable annuity contracts with the defendants at any time during the class period, or in the alternative, all sponsors of 457(b) deferred compensation plans in Florida that had variable annuity contracts with the defendants during the class period. The Class Period is from January 1, 1996 until the Class Notice is provided. The plaintiff alleges that the defendants breached their fiduciary duties by arranging for and retaining service payments from certain mutual funds. The complaint seeks an accounting, a declaratory judgment, a permanent injunction and disgorgement or restitution of the service fee payments allegedly received by the defendants, including interest. On January 25, 2007, the Company filed a motion to dismiss. The Company intends to defend this lawsuit vigorously.

On February 11, 2005, NLIC was named in a class action lawsuit filed in Common Pleas Court, Franklin County, Ohio entitled Michael Carr v. Nationwide Life Insurance Company. The complaint seeks recovery for breach of contract, fraud by omission, violation of the Ohio Deceptive Trade Practices Act and unjust enrichment. The complaint also seeks unspecified compensatory damages, disgorgement of all amounts in excess of the guaranteed maximum premium and attorneys’ fees. On February 2, 2006, the Court granted the plaintiff’s motion for class certification on the breach of contract and unjust enrichment claims. The Court certified a class consisting of all residents of the United States and the Virgin Islands who, during the Class Period, paid premiums on a modal basis to NLIC for term life insurance policies issued by NLIC during the Class Period that provide for guaranteed maximum premiums, excluding certain specified products. Excluded from the class are NLIC; any parent, subsidiary or affiliate of NLIC; all employees, officers and directors of NLIC; and any justice, judge or magistrate judge of the State of Ohio who may hear the case. The Class Period is from February 10, 1990 through February 2, 2006, the date the class was certified. On January 26, 2007, the plaintiff filed a motion for summary judgment. NLIC continues to defend this lawsuit vigorously.

On April 13, 2004, NLIC was named in a class action lawsuit filed in Circuit Court, Third Judicial Circuit, Madison County, Illinois, entitled Woodbury v. Nationwide Life Insurance Company. NLIC removed this case to the United States District Court for the Southern District of Illinois on June 1, 2004. On December 27, 2004, the case was transferred to the United States District Court for the District of Maryland and included in the multi-district proceeding entitled In Re Mutual Funds Investment Litigation. In response, on May 13, 2005, the plaintiff

F-60

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

filed a First Amended Complaint purporting to represent, with certain exceptions, a class of all persons who held (through their ownership of an NLIC annuity or insurance product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing or stale price trading activity. The First Amended Complaint purports to disclaim, with respect to market timing or stale price trading in NLIC’s annuities sub-accounts, any allegation based on NLIC’s untrue statement, failure to disclose any material fact, or usage of any manipulative or deceptive device or contrivance in connection with any class member’s purchases or sales of NLIC annuities or units in annuities sub-accounts. The plaintiff claims, in the alternative, that if NLIC is found with respect to market timing or stale price trading in its annuities sub-accounts, to have made any untrue statement, to have failed to disclose any material fact or to have used or employed any manipulative or deceptive device or contrivance, then the plaintiff purports to represent a class, with certain exceptions, of all persons who, prior to NLIC’s untrue statement, omission of material fact, use or employment of any manipulative or deceptive device or contrivance, held (through their ownership of an NLIC annuity or insurance product) units of any NLIC sub-account invested in mutual funds that included foreign securities in their portfolios and that experienced market timing activity. The First Amended Complaint alleges common law negligence and seeks to recover damages not to exceed $75,000 per plaintiff or class member, including all compensatory damages and costs. On June 1, 2006, the District Court granted NLIC’s motion to dismiss the plaintiff’s complaint. On November 29, 2006, the plaintiff filed its appellate brief with the Fourth Circuit Court of Appeals contesting the District Court’s dismissal. NLIC continues to defend this lawsuit vigorously.

On January 21, 2004, NLIC, NLICA, NLAIC, NFS and Nationwide Financial Corporation (collectively referred to as the Companies) were named in a lawsuit filed in the United States District Court for the Northern District of Mississippi entitled United Investors Life Insurance Company v. Nationwide Life Insurance Company and/or Nationwide Life Insurance Company of America and/or Nationwide Life and Annuity Insurance Company and/or Nationwide Life and Annuity Company of America and/or Nationwide Financial Services, Inc. and/or Nationwide Financial Corporation, and John Does A-Z. In its complaint, the plaintiff alleges that the Companies and/or their affiliated life insurance companies caused the replacement of variable insurance policies and other financial products issued by United Investors with policies issued by the Companies. The plaintiff raises claims for (1) violations of the Federal Lanham Act, and common law unfair competition and defamation; (2) tortious interference with the plaintiff’s contractual relationship with Waddell & Reed, Inc. and/or its affiliates, Waddell & Reed Financial, Inc., Waddell & Reed Financial Services, Inc. and W&R Insurance Agency, Inc., or with the plaintiff’s contractual relationships with its variable policyholders; (3) civil conspiracy; and (4) breach of fiduciary duty. The complaint seeks compensatory damages, punitive damages, pre- and post-judgment interest, a full accounting, a constructive trust and costs and disbursements, including attorneys’ fees. On December 30, 2005, the Companies filed a motion for summary judgment. On June 15, 2006, the District Court granted the Companies’ motion for summary judgment on all grounds and dismissed the plaintiff’s entire case with prejudice. The plaintiff appealed the District Court’s decision to the Fifth Circuit Court of Appeals. The appeal has been fully briefed, and the Companies are awaiting a decision. The Companies continue to defend this lawsuit vigorously.

On August 15, 2001, NFS and NLIC were named in a lawsuit filed in the United States District Court for the District of Connecticut entitled Lou Haddock, as trustee of the Flyte Tool & Die, Incorporated Deferred Compensation Plan, et al v. Nationwide Financial Services, Inc. and Nationwide Life Insurance Company. Currently, the plaintiffs’ fifth amended complaint, filed March 21, 2006, purports to represent a class of qualified retirement plans under the Employee Retirement Income Security Act of 1974, as amended (ERISA), that purchased variable annuities from NLIC. The plaintiffs allege that they invested ERISA plan assets in their variable annuity contracts and that NLIC and NFS breached ERISA fiduciary duties by allegedly accepting service payments from certain mutual funds. The complaint seeks disgorgement of some or all of the payments

F-61

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

allegedly received by NLIC and NFS, other unspecified relief for restitution, declaratory and injunctive relief, and attorneys’ fees. To date, the District Court has rejected the plaintiffs’ request for certification of the alleged class. NFS’ and NLIC’s motion to dismiss the plaintiffs’ fifth amended complaint is currently pending before the court. NFS and NLIC continue to defend this lawsuit vigorously.

On October 9, 2003, NLICA was named as one of twenty-six defendants in a lawsuit filed in the United States District Court for the Middle District of Pennsylvania entitled Steven L. Flood, Luzerne County Controller and the Luzerne County Retirement Board on behalf of the Luzerne County Employee Retirement System v. Thomas A. Makowski, Esq., et al. NLICA is a defendant as the successor in interest to Provident Mutual Life Insurance Company, which is alleged to have entered into four agreements to manage assets and investments of the Luzerne County Employee Retirement System (the Plan). In their complaint, the plaintiffs allege that NLICA aided and abetted certain other defendants in breaching their fiduciary duties to the Plan. The plaintiffs also allege that NLICA violated the Federal Racketeer Influenced and Corrupt Organizations Act (RICO) by engaging in and conspiring to engage in an improper scheme to mismanage funds in order to collect excessive fees and commissions and that NLICA was unjustly enriched by the allegedly excessive fees and commissions. The complaint seeks treble compensatory damages, punitive damages, a full accounting, imposition of a constructive trust on all funds paid by the Plan to all defendants, pre- and post-judgment interest, and costs and disbursements, including attorneys’ fees. On August 24, 2004, the District Court issued an order dismissing the count alleging aiding and abetting a breach of fiduciary duty and one of the RICO counts. Fact and expert discovery has been completed. On October 11, 2006, NLICA filed a motion for summary judgment on all relevant counts contained in the complaint. Additionally, all other remaining defendants have filed a motion for summary judgment on all remaining claims. Those motions are pending before the court. NLICA continues to defend this lawsuit vigorously.

Tax Matters

The Company’s federal income tax returns are routinely audited by the IRS. Management has established tax reserves representing its best estimate of additional amounts it may be required to pay if certain tax positions it has taken are challenged and ultimately denied by the IRS. These reserves are reviewed regularly and are adjusted as events occur that management believes impact its liability for additional taxes, such as lapsing of applicable statutes of limitations, conclusion of tax audits or substantial agreement on the deductibility/non-deductibility of uncertain items, additional exposure based on current calculations, identification of new issues, release of administrative guidance or rendering of a court decision affecting a particular tax issue. Management believes its tax reserves reasonably provide for potential assessments that may result from IRS examinations and other tax-related matters for all open tax years.

(19) Guarantees

Since 2001, the Company has sold $626.1 million of credit enhanced equity interests in Low-Income-Housing Tax Credit Funds (Tax Credit Funds) to unrelated third parties. The Company has guaranteed cumulative after-tax yields to the third party investors ranging from 3.75% to 5.25% over periods ending between 2002 and 2022. As of December 31, 2006, the Company held guarantee reserves totaling $6.3 million on these transactions. These guarantees are in effect for periods of approximately 15 years each. The Tax Credit Funds provide a stream of tax benefits to the investors that will generate a yield and return of capital. If the tax benefits are not sufficient to provide these cumulative after-tax yields, then the Company must fund any shortfall, which is mitigated by stabilization collateral set aside by the Company at the inception of the transactions. The maximum amount of undiscounted future payments that the Company could be required to pay the investors under the terms of the guarantees is $1.36 billion. The Company does not anticipate making any payments related to these guarantees.

F-62

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

At the time of the sales, $5.9 million of net sale proceeds were set aside as collateral for certain properties owned by the Tax Credit Funds that had not met all of the criteria necessary to generate tax credits. Such criteria include completion of construction and the leasing of each unit to a qualified tenant, among others. Properties meeting the necessary criteria are considered to have “stabilized.” The properties are evaluated regularly, and the collateral is released when stabilized. During 2006 and 2005, no stabilization collateral amounts were released into income. As of December 31, 2006 and 2005, $2.2 million of stabilization collateral was unrecognized and recorded as a reserve, respectively.

To the extent there are cash deficits in any specific property owned by the Tax Credit Funds, property reserves, property operating guarantees and reserves held by the Tax Credit Funds are exhausted before the Company is required to perform under its guarantees. To the extent the Company is ever required to perform under its guarantees, it may recover any such funding out of the cash flow distributed from the sale of the underlying properties of the Tax Credit Funds. This cash flow distribution would be paid to the Company prior to any cash flow distributions to unrelated third party investors.

(20) Variable Interest Entities

As of December 31, 2006 and 2005, the Company had relationships with 18 and 19 variable interest entities (VIEs), respectively, each of which the Company was the primary beneficiary. As of December 31, 2006, each VIE was a conduit that assists the Company in structured products transactions involving the sale of Tax Credit Funds to third party investors for which the Company provides guaranteed returns (see Note 19). The results of operations and financial position of these VIEs are included along with corresponding minority interest liabilities in the accompanying consolidated financial statements.

VIE net assets were $445.5 million and $440.6 million as of December 31, 2006 and 2005, respectively. The following table summarizes the components of net assets as of the December 31:

(in millions)	2006			2005
Mortgage loans on real estate	$	—		$	31.5
Other long-term investments		432.5			478.6
Short-term investments		33.7			42.3
Other assets		37.8			41.3
Short-term debt		—			(32.6	)
Other liabilities		(58.5	)		(120.5	)

The Company’s total loss exposure from VIEs of which the Company is the primary beneficiary was immaterial as of December 31, 2006 and 2005 (except for the impact of guarantees disclosed in Note 19).

In addition to the VIEs described above, the Company holds variable interests, in the form of limited partnerships or similar investments, in Tax Credit Funds of which the Company is not the primary beneficiary. These investments have been held by the Company for periods of 1 to 10 years and allow the Company to utilize certain tax credits and realize other tax benefits from affordable housing projects. The Company also has certain investments in other securitization transactions that qualify as VIEs, but of which the Company is not the primary beneficiary. The total exposure to loss on these VIEs was $175.0 million and $67.0 million as of December 31, 2006 and 2005, respectively.

F-63

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

(21) Segment Information

Management views the Company’s business primarily based on its underlying products and uses this basis to define its four reportable segments: Individual Investments, Retirement Plans, Individual Protection, and Corporate and Other.

The primary segment profitability measure that management uses is pre-tax operating earnings, which is calculated by adjusting income from continuing operations before federal income taxes and discontinued operations to exclude: (1) net realized gains and losses on investments, hedging instruments and hedged items, except for operating items (periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations); and (2) the adjustment to amortization of DAC and VOBA related to net realized gains and losses.

Individual Investments

The Individual Investments segment consists of individual The BEST of AMERICA^® and private label deferred variable annuity products, individual annuity products, deferred fixed annuity products, income products and advisory services. Individual deferred annuity contracts provide the customer with tax-deferred accumulation of savings and flexible payout options including lump sum, systematic withdrawal or a stream of payments for life. In addition, individual variable annuity contracts provide the customer with access to a wide range of investment options and asset protection features, while individual fixed annuity contracts generate a return for the customer at a specified interest rate fixed for prescribed periods.

Retirement Plans

The Retirement Plans segment is comprised of the Company’s private and public sector retirement plans business. The private sector primarily includes IRC Section 401(k) fixed and variable group annuity business generated through NLIC and trust and custodial services through Nationwide Trust Company, FSB a division of Nationwide Bank, and RIA. The public sector primarily includes IRC Section 457 and Section 401(a) business in the form of full-service arrangements that provide plan administration and fixed and variable group annuities as well as administration-only business. Retirement Plans sales do not include large case retirement plan acquisitions and Nationwide employee and agent benefit plans.

Individual Protection

The Individual Protection segment consists of investment life insurance products, including individual variable, COLI and BOLI products; traditional life insurance products; universal life insurance products; and the operating results of TBG Financial. Life insurance products provide a death benefit and generally allow the customer to build cash value on a tax-advantaged basis.

Corporate and Other

The Corporate and Other segment includes structured products business; the MTN program; net investment income and certain expenses not allocated to other segments; periodic net coupon settlements on non-qualifying derivatives; trading portfolio realized gains and losses; trading portfolio valuation changes; interest expense on debt; revenues and expenses of the Company’s non-insurance subsidiaries not reported in other segments; and net realized gains and losses related to securitizations.

F-64

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

The following table summarizes the Company’s business segment operating results for the years ended December 31:

(in millions)	Individual Investments		Retirement Plans		Individual Protection		Corporate and Other			Total
2006
Revenues:
Policy charges	$	588.4	$	174.5	$	553.1	$	—		$	1,316.0
Traditional life insurance and immediate annuity premiums		142.5		—		299.0		—			441.5
Net investment income		781.1		652.2		468.1		397.1			2,298.5
Net realized losses on investments, hedging instruments and hedged items1		—		—		—		(0.6	)		(0.6	)
Other income		2.3		284.2		25.3		48.3			360.1
Total revenues		1,514.3		1,110.9		1,345.5		444.8			4,415.5
Benefits and expenses:
Interest credited to policyholder account values		528.3		451.6		191.7		208.7			1,380.3
Life insurance and annuity benefits		202.4		—		444.4		—			646.8
Policyholder dividends on participating policies		—		—		90.7		—			90.7
Amortization of DAC		352.7		38.3		81.6		(9.7	)		462.9
Amortization of VOBA		6.5		6.9		32.6		—			46.0
Interest expense on debt		—		—		0.6		103.1			103.7
Other operating expenses		213.6		397.6		229.1		65.9			906.2
Total benefits and expenses		1,303.5		894.4		1,070.7		368.0			3,636.6
Income from continuing operations before federal income tax expense		210.8		216.5		274.8		76.8		$	778.9
Net realized losses on investments, hedging instruments and hedged items1		—		—		—		0.6
Adjustment to amortization related to net realized gains and losses		—		—		—		(9.7	)
Pre-tax operating earnings	$	210.8	$	216.5	$	274.8	$	67.7
Assets as of period end	$	56,516.6	$	30,317.9	$	22,194.6	$	10,382.5		$	119,411.6

¹ Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).

F-65

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

(in millions)	Individual Investments		Retirement Plans		Individual Protection		Corporate and Other			Total
2005
Revenues:
Policy charges	$	540.2	$	154.7	$	546.6	$	—		$	1,241.5
Traditional life insurance and immediate annuity premiums		102.9		—		297.0		—			399.9
Net investment income		869.9		661.4		475.1		337.5			2,343.9
Net realized gains on investments, hedging instruments and hedged items1		—		—		—		18.2			18.2
Other income		1.5		225.6		29.8		47.5			304.4
Total revenues		1,514.5		1,041.7		1,348.5		403.2			4,307.9
Benefits and expenses:
Interest credited to policyholder account values		589.1		455.0		190.7		146.1			1,380.9
Life insurance and annuity benefits		155.4		—		419.5		—			574.9
Policyholder dividends on participating policies		—		—		107.3		—			107.3
Amortization of DAC		329.3		47.4		102.7		0.8			480.2
Amortization of VOBA		7.2		3.5		34.3		—			45.0
Interest expense on debt		—		—		0.3		107.7			108.0
Debt extinguishment costs		—		—		—		21.7			21.7
Other operating expenses		196.5		348.0		235.5		53.8			833.8
Total benefits and expenses		1,277.5		853.9		1,090.3		330.1			3,551.8
Income from continuing operations before federal income tax expense		237.0		187.8		258.2		73.1		$	756.1
Net realized gains on investments, hedging instruments and hedged items1		—		—		—		(18.2	)
Adjustment to amortization of DAC related to net realized gains and losses		—		—		—		0.8
Pre-tax operating earnings	$	237.0	$	187.8	$	258.2	$	55.7
Assets as of period end	$	53,809.7	$	31,678.1	$	19,755.6	$	10,916.5		$	116,159.9

¹ Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).

F-66

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

(in millions)	Individual Investments		Retirement Plans		Individual Protection		Corporate and Other			Total
2004
Revenues:
Policy charges	$	513.4	$	171.8	$	537.4	$	—		$	1,222.6
Traditional life insurance and immediate annuity premiums		90.8		—		311.9		—			402.7
Net investment income		872.8		647.6		467.9		243.4			2,231.7
Net realized losses on investments, hedging instruments and hedged items1		—		—		—		(40.9	)		(40.9	)
Other income		0.4		160.1		32.9		66.6			260.0
Total revenues		1,477.4		979.5		1,350.1		269.1			4,076.1
Benefits and expenses:
Interest credited to policyholder account values		606.1		446.1		189.4		86.7			1,328.3
Life insurance and annuity benefits		139.2		—		409.4		—			548.6
Policyholder dividends on participating policies		—		—		101.4		—			101.4
Amortization of DAC		276.1		39.9		114.4		—			430.4
Amortization of VOBA		7.5		4.7		40.1		—			52.3
Interest expense on debt		—		—		—		102.4			102.4
Other operating expenses		214.1		308.5		252.7		62.3			837.6
Total benefits and expenses		1,243.0		799.2		1,107.4		251.4			3,401.0
Income from continuing operations before federal income tax expense		234.4		180.3		242.7		17.7		$	675.1
Net realized losses on investments, hedging instruments and hedged items1		—		—		—		40.9
Pre-tax operating earnings	$	234.4	$	180.3	$	242.7	$	58.6
Assets as of period end	$	55,473.3	$	31,429.5	$	17,975.0	$	12,072.8		$	116,950.6

¹ Excluding operating items (periodic net coupon settlements on non-qualifying derivatives, trading portfolio realized gains and losses, trading portfolio valuation changes, and net realized gains and losses related to securitizations).

F-67

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

(22) Quarterly Results of Operations (Unaudited)

The following table summarizes the unaudited quarterly results of operations for the years ended December 31:

(in millions, except per share amounts)	First Quarter			Second Quarter			Third Quarter		Fourth Quarter
2006
Revenues:
Policy charges	$	321.0		$	337.6		$	327.6	$	329.8
Traditional life insurance and immediate annuity premiums		107.8			109.7			110.5		113.5
Net investment income		577.3			572.1			577.9		571.2
Net realized (losses) gains on investments, hedging instruments and hedged items		(6.8	)		(9.9	)		9.6		16.2
Other income		83.1			83.1			87.6		96.6
Total revenues		1,082.4			1,092.6			1,113.2		1,127.3
Benefits and expenses:
Interest credited to policyholder account values		342.1			345.7			348.2		344.3
Life insurance and annuity benefits		156.1			156.4			163.8		170.5
Policyholder dividends on participating policies		20.2			24.5			24.6		21.4
Amortization of DAC		120.6			126.0			108.2		108.1
Amortization of VOBA		11.6			12.5			14.5		7.4
Interest expense on debt		26.1			25.1			25.3		27.2
Other operating expenses		222.2			217.9			214.5		251.6
Total benefits and expenses		898.9			908.1			899.1		930.5
Income from continuing operations before federal income taxes		183.5			184.5			214.1		196.8
Federal income tax expense (benefit)		41.2			(73.3	)		54.6		42.6
Net income	$	142.3		$	257.8		$	159.5	$	154.2
Earnings per common share:
Basic	$	0.93		$	1.73		$	1.07	$	1.04
Diluted	$	0.93		$	1.72		$	1.06	$	1.03

F-68

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

December 31, 2006, 2005 and 2004

(in millions, except per share amounts)	First Quarter		Second Quarter			Third Quarter			Fourth Quarter
2005
Revenues:
Policy charges	$	309.1	$	307.0		$	315.0		$	310.4
Traditional life insurance premiums		95.9		99.7			97.2			107.1
Net investment income		576.1		587.1			593.0			587.7
Net realized gains (losses) on investments, hedging instruments and hedged items		27.5		2.5			(13.8	)		4.6
Other income		72.9		72.3			71.7			84.9
Total revenues		1,081.5		1,068.6			1,063.1			1,094.7
Benefits and expenses:
Interest credited to policyholder account values		334.5		348.1			350.6			347.7
Life insurance and annuity benefits		136.2		145.9			142.9			149.9
Policyholder dividends on participating policies		26.9		26.3			27.2			26.9
Amortization of DAC		123.4		114.8			118.5			123.5
Amortization of VOBA		12.0		11.7			11.3			10.0
Interest expense on debt		26.1		26.8			28.0			27.1
Debt extinguishment costs		—		—			21.7			—
Other operating expenses		203.8		201.3			208.4			220.3
Total benefits and expenses		862.9		874.9			908.6			905.4
Income from continuing operations before federal income taxes		218.6		193.7			154.5			189.3
Federal income tax expense (benefit)		59.5		50.1			(11.4	)		34.5
Income from continuing operations		159.1		143.6			165.9			154.8
Discontinued operations, net of taxes		1.4		(2.4	)		0.8			(24.5	)
Net income	$	160.5	$	141.2		$	166.7		$	130.3
Earnings from continuing operations per common share:
Basic	$	1.04	$	0.94		$	1.09		$	1.01
Diluted	$	1.04	$	0.93		$	1.08		$	1.01
Earnings per common share:
Basic	$	1.05	$	0.92		$	1.09		$	0.85
Diluted	$	1.05	$	0.92		$	1.08		$	0.85

F-69

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Schedule I Consolidated Summary of Investments—Other Than Investments in Related Parties

As of December 31, 2006 (in millions)

Column A	Column B		Column C		Column D
Type of investment	Cost		Market value		Amount at which shown in the consolidated balance sheet
Fixed maturity securities available-for-sale:
Bonds:
U.S. Treasury securities and obligations of U.S. Government corporations	$	179.0	$	189.1	$	189.1
Agencies not backed by the full faith and credit of the U.S. Government		564.5		608.4		608.4
Obligations of states and political subdivisions		274.7		268.0		268.0
Foreign governments		36.2		37.7		37.7
Public utilities		1,770.8		1,774.1		1,774.1
All other corporate		25,242.0		25,282.7		25,282.7
Total fixed maturity securities available-for-sale		28,067.2		28,160.0		28,160.0
Equity securities available-for-sale:
Common stocks:
Banks, trusts and insurance companies		23.5		31.2		31.2
Industrial, miscellaneous and all other		26.4		29.0		29.0
Nonredeemable preferred stocks		7.3		7.4		7.4
Total equity securities available-for-sale		57.2		67.6		67.6
Trading assets		22.7		24.3		24.3
Mortgage loans on real estate, net		8,922.8				8,909.8	1
Real estate, net:
Investment properties		69.8				53.3	2
Acquired in satisfaction of debt		6.1				6.0	2
Properties occupied by the entity		26.2				17.4	2
Total real estate, net		102.1				76.7
Policy loans		966.9				966.9
Other long-term investments		870.4				756.0	3, 4
Short-term investments, including amounts managed by a related party		2,215.6				2,215.6
Total investments	$	41,224.9			$	41,176.9

¹ Difference from Column B primarily is attributable to valuation allowances due to impairments on mortgage loans on real estate (see Note 6 to the audited consolidated financial statements), hedges and commitment hedges on mortgage loans on real estate.

² Difference from Column B primarily results from adjustments for accumulated depreciation.

³ Difference from Column B primarily is due to operating gains and/or losses of investments in limited partnerships.

⁴ Amount shown does not agree to the audited consolidated balance sheet due to $24.1 million in unconsolidated related party investments.

See accompanying report of independent registered public accounting firm.

F-70

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Schedule II Condensed Financial Information of Registrant (in millions)

Condensed Balance Sheets	December 31,
	2006		2005
Assets
Investments in subsidiaries	$	5,992.1	$	5,772.9
Short-term investments, including amounts managed by a related party		161.4		166.1
Trading assets		24.3		34.4
Investment in surplus notes from a subsidiary		700.0		700.0
Goodwill		97.4		102.9
Other assets		29.5		36.3
Total assets	$	7,004.7	$	6,812.6
Liabilities and Shareholders’ Equity
Long-term debt	$	1,398.5	$	1,398.0
Other liabilities		67.9		64.2
Total liabilities		1,466.4		1,462.2
Shareholders’ equity		5,538.3		5,350.4
Total liabilities and shareholders’ equity	$	7,004.7	$	6,812.6

	Years ended December 31,
Condensed Statements of Income	2006			2005			2004
Revenues:
Dividends received from subsidiaries	$	508.1		$	255.0		$	175.0
Net investment income		61.9			58.5			56.3
Net realized gains (losses) on investments, hedging instruments and hedged items		3.6			1.5			(1.6	)
Other income		0.1			2.1			0.1
Total revenues		573.7			317.1			229.8
Expenses:
Interest expense on long-term debt		91.3			95.1			96.7
Other operating expenses		18.9			23.4			3.8
Total expenses		110.2			118.5			100.5
Income before federal income tax benefit		463.5			198.6			129.3
Federal income tax benefit		(10.1	)		(14.1	)		(16.8	)
Income from continuing operations before equity in undistributed net income of subsidiaries		473.6			212.7			146.1
Equity in undistributed net income of subsidiaries		240.2			383.6			358.2
Income from continuing operations		713.8			596.3			504.3
Discontinued operations, net of taxes		—			2.4			(2.3	)
Net income	$	713.8		$	598.7		$	502.0

See accompanying notes to condensed financial statements and report of independent registered public accounting firm.

F-71

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Schedule II Condensed Financial Information of Registrant, Continued

	Years ended December 31,
Condensed Statements of Cash Flows (in millions)	2006			2005			2004
Cash flows from operating activities:
Net income	$	713.8		$	598.7		$	502.0
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gains) losses on investments, hedging instruments and hedged items		(3.6	)		(1.5	)		1.6
Equity in undistributed net income of subsidiaries		(240.2	)		(383.6	)		(358.2	)
Amortization		0.9			2.2			4.0
Other, net		19.3			(29.2	)		3.3
Net cash provided by operating activities		490.2			186.6			152.7
Cash flows from investing activities:
Cash paid to acquire companies and capital contributed to subsidiaries		(50.0	)		(14.1	)		(15.8	)
Sale of subsidiary, net		—			59.2			—
Net decrease (increase) in short-term investments		4.7			(87.3	)		(44.2	)
Other, net		8.7			(17.1	)		(5.8	)
Net cash used in investing activities		(36.6	)		(59.3	)		(65.8	)
Cash flows from financing activities:
Net proceeds from issuance of long-term debt		—			199.4			—
Principal payments on long-term debt		—			(206.2	)		—
Cash dividends paid		(132.7	)		(114.8	)		(101.9	)
Common shares repurchased under announced program		(416.8	)		(49.0	)		—
Other, net		96.2			41.7			16.6
Net cash used in financing activities		(453.3	)		(128.9	)		(85.3	)
Net increase (decrease) in cash		0.3			(1.6	)		1.6
Cash, beginning of year		—			1.6			—
Cash, end of year	$	0.3		$	—		$	1.6

See accompanying notes to condensed financial statements and report of independent registered public accounting firm.

F-72

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Schedule II Condensed Financial Information of Registrant, Continued

Notes to Condensed Financial Statements

(1) Organization and Presentation

NFS is the holding company for NLIC and other companies that comprise the domestic life insurance and retirement savings operations of the Nationwide group of companies, including NFN.

(2) Long-term Debt and Guarantees

The following table summarizes long-term debt as of December 31:

(in millions)	2006		2005
$300.0 million principal, 8.00% senior notes, due March 1, 2027	$	298.6	$	298.5
$300.0 million principal, 6.25% senior notes, due November 15, 2011		299.2		299.1
$300.0 million principal, 5.90% senior notes, due July 1, 2012		299.0		298.8
$200.0 million principal, 5.625% senior notes, due February 13, 2015		199.2		199.1
$200.0 million principal, 5.10% senior notes, due October 1, 2015		199.4		199.4
$100.0 million principal, 7.899% junior subordinated debentures issued to a related party, due March 1, 2037		103.1		103.1
Total long-term debt	$	1,398.5	$	1,398.0

See Note 12 to the audited consolidated financial statements of the Company included earlier in this report for a complete description of the components of long-term debt and for disclosure of distributions classified as interest expense.

(3) Related Party Transactions

NLIC made interest payments to NFS on surplus notes totaling $53.7 million in 2006 and 2005, and $50.7 million in 2004. Payments of interest and principal under the notes require the prior approval of the ODI.

See Note 17 to the audited consolidated financial statements of the Company included earlier in this report for a description of other related party transactions.

See accompanying report of independent registered public accounting firm.

F-73

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Schedule III Supplementary Insurance Information

As of December 31, 2006, 2005 and 2004 and for each of the years then ended (in millions)

Column A	Column B			Column C		Column D	Column E	Column F
Year: Segment	Deferred policy acquisition costs			Future policy benefits, losses, claims and loss expenses		Unearned premiums1	Other policy claims and benefits payable1	Premium revenue
2006
Individual Investments	$	1,945.0		$	13,753.4			$	142.5
Retirement Plans		292.1			11,163.2				—
Individual Protection		1,530.5			8,148.8				299.0
Corporate and Other		83.4			5,032.4				—
Total	$	3,851.0		$	38,097.8			$	441.5
2005
Individual Investments	$	1,997.7		$	15,815.0			$	102.9
Retirement Plans		294.8			11,264.6				—
Individual Protection		1,410.9			8,049.0				297.0
Corporate and Other		(18.0	)		4,619.5				—
Total	$	3,685.4		$	39,748.1			$	399.9
2004
Individual Investments	$	2,080.6		$	17,164.2			$	90.8
Retirement Plans		305.0			10,579.5				—
Individual Protection		1,312.6			7,985.6				311.9
Corporate and Other		(137.1	)		5,347.9				—
Total	$	3,561.1		$	41,077.2			$	402.7

Column A	Column G		Column H		Column I			Column J		Column K
Year: Segment	Net investment income2		Benefits, claims, losses and settlement expenses		Amortization of deferred policy acquisition costs			Other operating expenses2		Premiums written
2006
Individual Investments	$	781.1	$	730.7	$	352.7		$	213.6
Retirement Plans		652.2		451.6		38.3			397.6
Individual Protection		468.1		726.8		81.6			229.1
Corporate and Other		397.1		208.7		(9.7	)		65.9
Total	$	2,298.5	$	2,117.8	$	462.9		$	906.2
2005
Individual Investments	$	869.9	$	744.5	$	329.3		$	196.5
Retirement Plans		661.4		455.0		47.4			348.0
Individual Protection		475.1		717.5		102.7			235.5
Corporate and Other		337.5		146.1		0.8			53.8
Total	$	2,343.9	$	2,063.1	$	480.2		$	833.8
2004
Individual Investments	$	872.8	$	745.3	$	276.1		$	214.1
Retirement Plans		647.6		446.1		39.9			308.5
Individual Protection		467.9		700.2		114.4			252.7
Corporate and Other		243.4		86.7		—			62.3
Total	$	2,231.7	$	1,978.3	$	430.4		$	837.6

¹ Unearned premiums and other policy claims and benefits payable are included in Column C amounts.

² Allocations of net investment income and certain operating expenses are based on numerous assumptions and estimates, and reported segment operating results would change if different methods were applied.

See accompanying report of independent registered public accounting firm.

F-74

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Schedule IV Reinsurance

As of December 31, 2006, 2005 and 2004 and for each of the years then ended (dollars in millions)

Column A	Column B		Column C		Column D		Column E		Column F
	Gross amount		Ceded to other companies		Assumed from other companies		Net amount		Percentage of amount assumed to net
2006
Life insurance in force	$	209,941.7	$	76,648.6	$	19.6	$	133,312.7	0.0	%
Premiums:
Life insurance1	$	475.8	$	51.1	$	1.8	$	426.5	0.4	%
Accident and health insurance		391.8		418.7		28.5		1.6	NM
Total	$	867.6	$	469.8	$	30.3	$	428.1	7.1	%
2005
Life insurance in force	$	197,781.9	$	71,895.0	$	474.2	$	126,361.1	0.4	%
Premiums:
Life insurance1	$	468.5	$	69.6	$	1.0	$	399.9	0.2	%
Accident and health insurance		418.5		446.6		29.9		1.8	NM
Total	$	887.0	$	516.2	$	30.9	$	401.7	7.7	%
2004
Life insurance in force	$	175,906.2	$	67,148.7	$	468.2	$	109,225.7	0.4	%
Premiums:
Life insurance1	$	454.5	$	52.6	$	0.6	$	402.5	0.1	%
Accident and health insurance		316.0		346.5		32.4		1.9	NM
Total	$	770.5	$	399.1	$	33.0	$	404.4	8.2	%

¹ Primarily represents premiums from traditional life insurance and life-contingent immediate annuities and excludes deposits on investment products and universal life insurance products.

See accompanying report of independent registered public accounting firm.

F-75

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Schedule V Valuation and Qualifying Accounts

Years ended December 31, 2006, 2005 and 2004 (in millions)

Column A	Column B		Column C				Column D		Column E
Description	Balance at beginning of period		Charged (credited) to costs and expenses		Charged to other accounts		Deductions1		Balance at end of period
2006
Valuation allowances—mortgage loans on real estate	$	35.1	$	5.8	$	—	$	4.9	$	36.0
2005
Valuation allowances—mortgage loans on real estate	$	36.9	$	2.5	$	—	$	4.3	$	35.1
2004
Valuation allowances—mortgage loans on real estate	$	32.4	$	7.8	$	—	$	3.3	$	36.9

¹ Amounts represent transfers to real estate owned and recoveries.

See accompanying report of independent registered public accounting firm.

F-76

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		NATIONWIDE FINANCIAL SERVICES, INC. (Registrant)
Date: March 1, 2007	By	/s/    W.G. JURGENSEN
		W.G. Jurgensen, Chief Executive Officer

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

/s/    ARDEN L. SHISLER         Arden L. Shisler, Chairman of the Board	February 21, 2007 Date	/s/    W.G. JURGENSEN         W.G. Jurgensen, Chief Executive Officer and Director	March 1, 2007 Date
/s/    JOSEPH A. ALUTTO         Joseph A. Alutto, Director	February 21, 2007 Date	/s/    JAMES G. BROCKSMITH, JR.         James G. Brocksmith, Jr., Director	February 21, 2007 Date
/s/    KEITH W. ECKEL         Keith W. Eckel, Director	February 21, 2007 Date	/s/    LYDIA M. MARSHALL         Lydia M. Marshall, Director	February 21, 2007 Date
/s/    DONALD L. MCWHORTER         Donald L. McWhorter, Director	February 21, 2007 Date	/s/    DAVID O. MILLER         David O. Miller, Director	February 21, 2007 Date
/s/    MARTHA MILLER DE LOMBERA         Martha Miller de Lombera, Director	February 21, 2007 Date	/s/    JAMES F. PATTERSON         James F. Patterson, Director	February 21, 2007 Date
/s/    GERALD D. PROTHRO         Gerald D. Prothro, Director	February 21, 2007 Date	/s/    ALEX SHUMATE         Alex Shumate, Director	February 21, 2007 Date
/s/    MARK R. THRESHER         Mark R. Thresher, President and Chief Operating Officer	March 1, 2007 Date	/s/    TIMOTHY G. FROMMEYER         Timothy G. Frommeyer, Senior Vice President—Chief Financial Officer	March 1, 2007 Date

F-77

Exhibit Index

Exhibit
3.1	Form of Restated Certificate of Incorporation of Nationwide Financial Services, Inc. (previously filed as Exhibit 3.1 to Form S-1/A, Registration Number 333-18527, filed February 10, 1997, and incorporated herein by reference)
3.2	Amended and Restated Bylaws of Nationwide Financial Services, Inc.
4.1	Form of Indenture relating to the 8.00% senior notes, including the form of Global Note and the form of Definitive Note (previously filed as Exhibit 4.1 to Form S-1/A, Registration Number 333-18531, filed February 10, 1997, and incorporated herein by reference)
4.2	Form of Indenture relating to the Junior Subordinated Deferrable Interest Debentures due 2037 of Nationwide Financial Services, Inc. (previously filed as Exhibit 4.1 to Form S-1, Registration Number 333-18533, filed March 5, 1997, and incorporated herein by reference)
4.3	Senior Indenture dated November 1, 2001 relating to senior notes (previously filed as Exhibit 4.1 to Form 8-K, Commission File Number 333-18527, filed November 16, 2001, and incorporated herein by reference)
4.4	Form of First Supplemental Indenture relating to the 6.25% senior notes (previously filed as Exhibit 4.2 to Form 8-K, Commission File Number 333-18527, filed November 16, 2001, and incorporated herein by reference)
4.5	Second Supplemental Indenture relating to the 5.90% senior notes (previously filed as Exhibit 4.1 to Form 8-K, Commission File Number 333-18527, filed June 24, 2002, and incorporated herein by reference)
4.6	Third Supplemental Indenture relating to the 5.625% senior notes (previously filed as Exhibit 4.1 to Form 8-K, Commission File Number 1-12785, filed February 13, 2003, and incorporated herein by reference)
4.7	Fourth Supplemental Indenture relating to the 5.10% senior notes (previously filed as Exhibit 4.1 to Form 8-K, Commission File Number 1-12785, filed September 23, 2005, and incorporated herein by reference)
10.1	Form of Intercompany Agreement among Nationwide Mutual Insurance Company, Nationwide Corporation and Nationwide Financial Services, Inc. (previously filed as Exhibit 10.1 to Form S-1/A, Registration Number 333-18533, filed March 5, 1997, and incorporated herein by reference)
10.1.1	Form of Amendment No. 1 to the Intercompany Agreement among Nationwide Mutual Insurance Company, Nationwide Corporation and Nationwide Financial Services, Inc. (previously filed as Exhibit 10.1.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)
10.2	Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Financial Services, Inc. and any corporation that may hereafter be a subsidiary of Nationwide Financial Services, Inc. (previously filed as Exhibit 10.3 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)
10.3	Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Life Insurance Company and any corporation that may hereafter be a subsidiary of Nationwide Life Insurance Company (previously filed as Exhibit 10.4 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)

F-78

Exhibit
10.4	Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Life Insurance Company of America and any corporation that may hereafter be a subsidiary of Nationwide Life Insurance Company of America (previously filed as Exhibit 10.5 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)
10.5	Form of Tax Sharing Agreement dated as of October 1, 2002 among Nationwide Provident Holding Company and any corporation that may hereafter be a subsidiary of Nationwide Provident Holding Company (previously filed as Exhibit 10.2 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)
10.6	Form of Amended and Restated Cost Sharing Agreement among parties named therein (previously filed as Exhibit 10.3 to Form 10-K, Commission File Number 1-12785, filed March 14, 2003, and incorporated herein by reference)
10.7	Amended and Restated Five Year Credit Agreement, dated May 13, 2005, among Nationwide Financial Services, Inc., Nationwide Life Insurance Company, Nationwide Mutual Insurance Company, the banks party thereto and Wachovia Bank, National Association, as agent and Citicorp USA, Inc., as syndication agent (previously filed as Exhibit 10.1 to Form 8-K, Commission File Number 1-12785, filed May 19, 2005, and incorporated herein by reference)
10.8	Form of Lease Agreement between Nationwide Mutual Insurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company and Nationwide Financial Services, Inc. (previously filed as Exhibit 10.7 to Form S-1/A, Registration Number 333-18531, filed February 25, 1997, and incorporated herein by reference)
10.9*	Form of Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (previously filed as Exhibit 10.4 to Form 10-Q, Commission File Number 1-12785, filed August 6, 2004, and incorporated herein by reference)
10.10*	General Description of Nationwide Performance Incentive Plan (previously filed as Exhibit 10.9 to Form 10-K, Commission File Number 333-18527, filed March 29, 2001, and incorporated herein by reference)
10.11*	Form of Amended and Restated Nationwide Office of Investments Incentive Plan dated as of October 7, 2003 (previously filed as Exhibit 10.13 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)
10.12*	Nationwide Excess Benefit Plan effective as of January 1, 2000 (previously filed as Exhibit 10.14 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)
10.13*	Nationwide Supplemental Retirement Plan As Amended and Restated effective January 1, 2005 (previously filed as Exhibit 10.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)
10.14*	Nationwide Severance Pay Plan effective as of March 1, 2003 (previously filed as Exhibit 10.16 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)
10.15*	Nationwide Supplemental Defined Contribution Plan effective as of January 1, 2005 (previously filed as Exhibit 10.17 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)
10.16*	Nationwide Individual Deferred Compensation Plan, as Amended and Restated, effective as of January 1, 2005 (previously filed as Exhibit 10.18 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)

F-79

Exhibit
10.17*	Nationwide Board of Directors Deferred Compensation Plan , as Amended and Restated, effective as of January 1, 2005 (previously filed as Exhibit 10.19 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)
10.18*	Second Amended and Restated Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee Directors (previously filed as Exhibit 10.19 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)
10.19	Investment Agency Cost Allocation Agreement dated October 30, 2002 between Nationwide Financial Services, Inc. and Nationwide Cash Management Company (previously filed as Exhibit 10.21 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)
10.20	Investment Agency Cost Allocation Agreement dated October 30, 2002 between Nationwide Life Insurance Company and Nationwide Cash Management Company (previously filed as Exhibit 10.22 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)
10.21	Investment Agency Cost Allocation Agreement dated October 30, 2002 between Nationwide Life and Annuity Insurance Company and Nationwide Cash Management Company (previously filed as Exhibit 10.23 to Form 10-K, Commission File Number 1-12785, filed March 11, 2004, and incorporated herein by reference)
10.22	Master Repurchase Agreement between Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and Nationwide Mutual Insurance Company and certain of its Subsidiaries and affiliates (previously filed as Exhibit 10.20 to Form 10-K, Commission File Number 1-12785, filed March 29, 2000, and incorporated herein by reference)
10.23	Stock Purchase and Sale Agreement between Nationwide Corporation and Nationwide Financial Services, Inc. (previously filed as Exhibit 10.21 to Form 10-K, Commission File Number 1-12785, filed March 29, 2000, and incorporated herein by reference)
10.24	Stock Purchase and Sale Agreement between Nationwide Financial Services, Inc. and Nationwide Mutual Insurance Company (previously filed as Exhibit 10.22 to Form 10-K, Commission File Number 333-18527, filed March 29, 2000, and incorporated herein by reference)
10.25*	Form of Employment Agreement, dated January 1, 2000, between Nationwide Mutual Insurance Company and Patricia Hatler (previously filed as Exhibit 10.25 to Form 10-Q, Commission File Number 333-18527, filed August 14, 2000, and incorporated herein by reference)
10.25.1*	Amendment of Employment Agreement, effective as of March 1, 2005, between Nationwide Mutual Insurance Company and Patricia Hatler (previously filed as Exhibit 10.28.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)
10.26*	Form of Employment Agreement, dated January 1, 2000, between Nationwide Mutual Insurance Company and Greg Lashutka (previously filed as Exhibit 10.28 to Form 10-Q, Commission File Number 333-18527, filed August 14, 2000, and incorporated herein by reference)
10.26.1*	Amendment of Employment Agreement, effective as of March 1, 2005, between Nationwide Mutual Insurance Company and Greg Lashutka (previously filed as Exhibit 10.31.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)
10.27*	Form of Employment Agreement between Nationwide Mutual Insurance Company and Robert Rosholt (previously filed as Exhibit 10.30 to Form 10-Q, Commission File Number 1-12785, filed May 14, 2003, and incorporated herein by reference)

F-80

Exhibit
10.28*	Form of Employment Agreement, dated May 26, 2000, between Nationwide Mutual Insurance Company and W.G. Jurgensen (previously filed as Exhibit 10.32 to Form 10-Q, Commission File Number 333-18527, filed November 13, 2000, and incorporated herein by reference)
10.28.1*	Amendment of Employment Agreement, effective as of March 1, 2005, between Nationwide Mutual Insurance Company and W.G. Jurgensen (previously filed as Exhibit 10.31.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)
10.29*	Form of Employment Agreement, dated February 25, 2004, between Nationwide Mutual Insurance Company and Terri L. Hill (previously filed as Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed May 7, 2004, and incorporated herein by reference)
10.30*	Form of Employment Agreement, dated January 1, 2004 and fully executed on April 7, 2004, between Nationwide Financial Services, Inc. and Mark R. Thresher (previously filed as Exhibit 10.3 to Form 10-Q, Commission File Number 1-12785, filed August 6, 2004, and incorporated herein by reference)
10.31*	Offer Letter for Keith Millner, dated November 19, 2004 (previously filed as Exhibit 10.1 to Form 8-K, Commission File Number 1-12785, filed December 3, 2004, and incorporated herein by reference)
10.32*	Form of Employment Agreement, dated June 4, 2001, between Nationwide Mutual Insurance Company and Michael C. Keller (previously filed as Exhibit 10.36 to Form 10-Q, Commission File Number 333-18527, filed August 10, 2001, and incorporated herein by reference)
10.32.1*	Amendment of Employment Agreement, effective as of March 1, 2005, between Nationwide Mutual Insurance Company and Michael C. Keller (previously filed as Exhibit 10.41.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2005, and incorporated herein by reference)
10.33	Form of Employee Leasing Agreement, dated July 1, 2000, between Nationwide Mutual Insurance Company and Nationwide Financial Services, Inc. (previously filed as Exhibit 10.35 to Form 10-Q, Commission File Number 333-18527, filed May 11, 2001, and incorporated herein by reference)
10.34*	Nationwide Financial Services, Inc. Senior Executive Incentive Plan (previously filed as Exhibit 10.37 to Form 10-Q, Commission File Number 1-12785, filed August 10, 2001, and incorporated herein by reference)
10.34.1*	First Amendment to the Nationwide Financial Services, Inc. Senior Executive Incentive Plan (previously filed as Exhibit 10.6 to Form 10-Q, Commission File Number 1-12785, filed August 6, 2004, and incorporated herein by reference)
10.35	Fund Participation Agreement between Nationwide Financial Services, Inc., Gartmore Mutual Fund Capital Trust and Gartmore Distribution Services, Inc. dated as of May 2, 2005 (previously filed as Exhibit 10.38 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)
10.36	Fund Agreement between Nationwide Financial Services, Inc., Gartmore Mutual Fund Capital Trust, Gartmore Mutual Funds, Gartmore Morley Capital Management, Inc. and Gartmore Distribution Services, Inc. dated as of October 1, 2002 (previously filed as Exhibit 10.39 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)
10.36.1	Amendment No. 1 dated August 1, 2005 to Fund Agreement between Nationwide Financial Services, Inc., Gartmore Mutual Fund Capital Trust, Gartmore Mutual Funds, Gartmore Morley Capital Management, Inc. and Gartmore Distribution Services, Inc. dated as of October 1, 2002 (previously filed as Exhibit 10.39.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)

F-81

Exhibit
10.37	Letter of Agreement between Nationwide Financial Services, Inc. and Gartmore Mutual Fund Capital Trust dated as of December 21, 2005 (previously filed as Exhibit 10.40 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)
10.38*	Form of NVA Target Award Opportunity and Stock Option Award Agreement for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (previously filed as Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed November 5, 2004, and incorporated herein by reference)
10.39*	Form of Restricted Stock Award Agreement for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed November 5, 2004, and incorporated herein by reference)
10.40*	Form of Non-Qualified Stock Option Award Agreement for the Board of Directors for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (previously filed as Exhibit 10.3 to Form 10-Q, Commission File Number 1-12785, filed November 5, 2004, and incorporated herein by reference)
10.41*	Form of Deferred Stock Unit Agreement (Cash Settlement) for the Second Amended and Restated Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee Directors (previously filed as Exhibit 10.44 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)
10.41.1*	Form of Deferred Stock Unit Agreement (Share Settlement) for the Second Amended and Restated Nationwide Financial Services, Inc. Stock Retainer Plan for Non-Employee Directors (previously filed as Exhibit 10.44.1 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)
10.42*	Employment letter agreement between Nationwide Financial Services, Inc. and John Carter dated October 27, 2005 (previously filed as Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2005, and incorporated herein by reference)
10.43*	Summary of terms of employment of Timothy G. Frommeyer (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2005, and incorporated herein by reference)
10.44*	Summary of Non-Employee Director Compensation (previously filed as Exhibit 10.47 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)
10.45	Form of Software License Agreement (previously filed as Exhibit 10.4 to Form 10-Q, Commission File Number 1-12785, filed August 4, 2005, and incorporated herein by reference)
10.46*	Employment Offer Letter Agreement between Nationwide Financial Services, Inc. and Gail Snyder dated November 28, 2005 (previously filed as Exhibit 10.49 to Form 10-K, Commission File Number 1-12785, filed March 1, 2006, and incorporated herein by reference)
10.47	Purchase Agreement between Nationwide Financial Services, Inc. and UBS AG, London branch, dated March 30, 2006 (previously filed as Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed May 5, 2006, and incorporated herein by reference)
10.48*	Form of NVA Target Award Opportunity and Stock Option Award for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed May 5, 2006, and incorporated herein by reference)

F-82

Exhibit
10.49	*	Form of NVA Target Award Opportunity for Third Amended and Restated Nationwide Financial Services, Inc. 1996 Long-Term Equity Compensation Plan (previously filed as Exhibit 10.3 to Form 10-Q, Commission File Number 1-12785, filed May 5, 2006, and incorporated herein by reference)
10.50		Agreement and Plan of Merger between Nationwide Federal Credit Union, Nationwide Bank and Nationwide Financial Services, Inc., dated June 16, 2006 (previously filed as Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed August 3, 2006, and incorporated herein by reference)
10.51	*	Offer Letter for Anne L. Arvia, dated June 30, 2006 (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed August 3, 2006, and incorporated herein by reference)
10.52		Guarantee Agreement between Nationwide Financial Services, Inc. and Wachovia Bank, National Association, dated June 29, 2006 (previously filed as Exhibit 10.3 to Form 10-Q, Commission File Number 1-12785, filed August 3, 2006, and incorporated herein by reference)
10.53	*	Offer Letter for William Jackson, dated August 21, 2006 (previously filed as Exhibit 10.1 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2006, and incorporated herein by reference)
10.54	*	Offer Letter for James Lyski, dated August 30, 3006 (previously filed as Exhibit 10.2 to Form 10-Q, Commission File Number 1-12785, filed November 3, 2006, and incorporated herein by reference)
10.55		Share Purchase Agreement between Nationwide Financial Services, Inc. and Nationwide Corporation, dated November 27, 2006
10.56		Guaranty Agreement between Nationwide Financial Services, Inc. and The Charles Schwab Corporation, dated December 22, 2006
10.57	*	Form of Employment Agreement, dated October 16, 2006, between Nationwide Financial Services, Inc. and James R. Lyski
12		Computation of Ratio of Earnings to Fixed Charges
18		Letter regarding change in accounting principle from KPMG LLP (previously filed as Exhibit 18 to Form 10-Q, Commission File Number 1-12785, filed November 12, 2003, and incorporated herein by reference)
21		Subsidiaries of the Registrant
23		Consent of KPMG LLP, Independent Registered Public Accounting Firm
31.1		Certification of W.G. Jurgensen pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Timothy G. Frommeyer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of W.G. Jurgensen pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to be furnished in accordance with Regulation S-K, Item 601(b)(32)(ii) and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any document filed under the Securities Act of 1933, except as shall be expressly set forth by specific reference to such filing)
32.2		Certification of Timothy G. Frommeyer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit is intended to be furnished in accordance with Regulation S-K, Item 601(b)(32)(ii) and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or incorporated by reference into any document filed under the Securities Act of 1933, except as shall be expressly set forth by specific reference to such filing)

* Management Compensatory Plan

All other exhibits referenced by Item 601 of Regulation S-K are not required under the related instructions or are inapplicable and therefore have been omitted.

F-83

EX-3.2

Exhibit 3.2

AMENDED AND RESTATED BYLAWS

OF

NATIONWIDE FINANCIAL SERVICES, INC.

(hereinafter called the “Corporation”)

For the Government of the Stockholders

and Board of Directors

ARTICLE I

OFFICES

Section 1.    Registered Office. The registered office of the Corporation in the State of Delaware is c/o Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, in the State of Delaware.

Section 2.    Other Offices. The Corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the Corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 1.    Meetings In or Out of State. Any annual or special meeting of stockholders may be held in or outside of the State of Delaware.

Section 2.    Annual Meetings. An annual meeting of the stockholders for the election of directors and such other business as may come before the meeting shall be held on such date, at such place and at such time as shall be designated by the Board of Directors. If for any reason the annual meeting is not held as provided for in this section, then the business to be transacted thereat may be transacted at any special meeting of stockholders called as provided for in Section 3 of this Article II.

Section 3.    Special Meetings. Special meetings of the stockholders may be called by the Chairman of the Board, the Chief Executive Officer or the President and Chief Operating Officer and shall be called by the Secretary at the request in writing of a majority of the members of the Board of Directors. No business other than that included in the notice of the special meeting shall be acted upon at such meeting.

Section 4.    Notice of Stockholders’ Meetings. A written, printed or typewritten notice of each annual or special meeting of the stockholders, stating the place, time and date and, if it is for a special meeting, the purpose or

purposes thereof, shall be delivered or mailed to each stockholder of record entitled to vote at such meeting or entitled to notice thereof. If mailed, such notice shall be addressed to such stockholder’s last known address as the same appears on the records of the Corporation. Such notices for each annual or special meeting shall be so delivered or mailed not more than 60 nor less than 10 days before the date fixed for the meeting. In the event of the transfer of shares after notice has been given and prior to the holding of the meeting, it shall not be necessary to serve notice upon the transferee. If a meeting is adjourned to another time or place and such adjournment is for 30 days or less and no new record date is fixed for the adjourned meeting, no further notice as to such adjourned meeting need be given if the time and place to which the meeting is adjourned are fixed and announced at such meeting. If the adjournment is for more than 30 days, or after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting or entitled to notice thereof.

Section 5.    Waiver of Notice. Any stockholder entitled to notice of any stockholders’ meeting may, in person or by proxy, either before, at or after such meeting, waive notice in writing, which writing shall be filed with or entered upon the records of the meeting, of any or all of the provisions of law, the Certificate of Incorporation of the Corporation, as amended and restated from time to time (the “Certificate of Incorporation”), or these Bylaws as to notice of such meeting, including the time, place and purpose thereof, or as to any irregularities in such notice or arising in connection therewith or with the giving thereof and shall thereby validate the proceedings at such meeting as fully as though all of the requirements waived had been duly met in their respective cases. The attendance of any stockholder at any such meeting, in person or by proxy, without protesting the lack of a proper notice of such meeting shall be deemed to be a waiver of notice of such meeting.

Section 6.    Quorum. A stockholders’ meeting duly called shall not be organized for the transaction of business unless a quorum is present. Except as otherwise expressly provided by law, the Certificate of Incorporation, these Bylaws or any certificate filed under Section 151(g) of the Delaware General Corporation Law (the “DGCL”) (or its successor statute as in effect from time to time), the presence in person or by proxy of holders of record entitled to exercise at least a majority of the voting power of the Corporation shall constitute a quorum for such meeting. The stockholders present at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. If a meeting cannot be organized because a quorum has not attended, stockholders representing a majority of the voting power of the stockholders present may adjourn, or, in the absence of a decision by the majority, any officer entitled to preside at such meeting may adjourn the meeting from time to time to such time (not more than

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30 days after the previously adjourned meeting) and place as such stockholders or officer may determine, without notice other than by announcement at the meeting of the time and place of the adjourned meeting. At any such adjourned meeting at which a quorum is present any business may be transacted which might have been transacted at the meeting as originally called.

Section 7.    Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 days nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of such meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

Section 8.    Voting.

(a)      Stockholders Entitled to Vote. Each stockholder shall, at each meeting of the stockholders, be entitled to vote in person or by proxy each share or fractional share of the stock of the Corporation having voting rights on the matter in question and which shall have been held by him or her and registered in his name on the books of the Corporation on the date fixed pursuant to Section 7 of this Article II as the record date for the determination of stockholders entitled to notice of and to vote at such meeting.

(b)      Voting by Another Corporation. Subject to the provisions of the Certificate of Incorporation and subsection (a) of this Section 8, the Chairman of the Board of Directors, the President, any Vice President, the Secretary, the Treasurer or any other duly elected officer or duly authorized agent, proxy or attorney-in-fact of another corporation holding shares of this Corporation and entitled to vote at any meeting shall conclusively be deemed to have authority to vote such shares and to execute proxies and written waivers or consents in relation thereto, whether such shares are held in a fiduciary capacity or otherwise, unless before a vote is taken or a consent or waiver is acted upon, a certified copy of the bylaws, or a resolution of the board of directors, of the corporation holding such shares is delivered to the Secretary of this Corporation, showing that such authority does not exist or is vested in some other officer or person. A person executing such writing or so acting as one of such officers, agents, proxies or attorneys-in-fact of such corporation shall, for the purposes of this Subsection (b), be prima facie deemed to be duly elected (if applicable) or appointed, qualified and acting as such officer, agent, proxy or attorney-in-fact and to be fully authorized.

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(c)     Voting by Proxy. A stockholder may, through a written proxy, authorize another person (who need not be a stockholder) to vote in the stockholder’s stead and to represent the stockholder at one or more stockholders’ meetings, whether annual or special meetings, or any adjournment thereof, but such instrument must be filed with the Secretary of this Corporation before the convening of the meeting and before the person authorized thereby may exercise the rights thereunder. A vote in accordance with the terms of a duly filed proxy shall be valid notwithstanding the previous death of the principal or the revocation of the appointment or the transfer of the share on which the vote was given, unless notice in writing of such death, revocation or transfer shall have been received by the Secretary of this Corporation, or such revocation is made in open meeting, before the vote is taken or the authority granted is otherwise exercised; provided, however, that no proxy hereafter made shall be valid after the expiration of 3 years after the date of its execution unless the stockholder executing it shall have specified therein the length of time it is to continue in force. A telegram, cablegram, wireless message or photograph, photostatic or equivalent reproduction of a writing appointing a proxy or proxies shall be a sufficient writing. A stockholder, without affecting any vote previously taken, may revoke such writing not otherwise revoked by giving notice to this Corporation in writing or in open meeting.

Section 9.    Inspectors of Election. The Board of Directors, in advance of any meeting of stockholders, may appoint 3 inspectors to act at the meeting. If inspectors are not so appointed, the person acting as the chairman of any meeting of stockholders may appoint such inspectors. If any person so appointed fails to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting or at the meeting by the person acting as chairman thereat. The inspectors so appointed, if any, shall: (i) determine the number of shares outstanding, the voting rights with respect to the shares outstanding, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies; (ii) receive votes, ballots, consents, waivers or releases; (iii) hear and determine all challenges and questions arising in connection with the vote; (iv) count and tabulate all votes, consents, waivers, and releases; (v) determine and announce the result; and (vi) do such acts as are proper to conduct the election or vote with fairness to all stockholders. The decision, act or certificate of a majority of the inspectors shall be effective in all respects as the decision, act or certificate of all 3 inspectors. If requested to do so by the person acting as chairman of the meeting, the inspectors shall make a report in writing of any challenge, question or matter determined by them, and make and execute a certificate of any facts found by them. The certificate of the inspectors shall be prima facie evidence of the facts therein stated and of the vote as certified by them.

Section 10.    Organization. At each meeting of the stockholders, the Chairman of the Board, or in his absence or by his or her request, the Chief Executive Officer, or in his or her absence or by his or her request, the President and Chief Operating Officer, or in his or her absence or by his or her request, any

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Vice President, or, in the absence of the Chairman of the Board, the Chief Executive Officer, the President and Chief Operating Officer and a Vice President, a chairman chosen by stockholders representing a majority of the voting power present in person or by proxy and entitled to vote shall act as chairman, and the Secretary of this Corporation, or, if the Secretary of this Corporation not be present, an Assistant Secretary, or if neither the Secretary nor an Assistant Secretary be present, any person whom the chairman of the meeting shall appoint, shall act as secretary of the meeting.

Section 11.    Advance Notice of Stockholder Proposals and Stockholder Nominations of Directors. In order to properly submit any business to, or nominate any person for election to the Board of Directors at, an annual meeting of stockholders, a stockholder must give timely notice in writing to the Secretary of the Corporation. To be considered timely, a stockholder’s notice must be delivered either in person or by United States certified mail, postage prepaid, and received at the principal executive offices of the Corporation (i) not less than 60 days nor more than 90 days before the first anniversary date of the Corporation’s proxy statement in connection with the last annual meeting of stockholders or (ii) if no annual meeting was held in the previous year or the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year’s proxy statement, not less than a reasonable time, as determined by the Board of Directors, prior to the date of the applicable annual meeting. With respect to any special meeting of stockholders, written notice of a stockholder’s proposal to submit business or to nominate a person for election to the Board of Directors must be delivered in the manner specified above and not later than the close of business on the seventh day following the earlier of (a) the day on which notice of such meeting is first given to stockholders or (b) the day on which public disclosure of the meeting is made.

The Secretary of the Corporation shall deliver any stockholder proposals and nominations received in a timely manner for review by the Board of Directors or a committee designated by the Board of Directors.

A stockholder’s notice to submit business at an annual meeting of stockholders shall set forth: (i) the name and address of such stockholder; (ii) the class and number of shares of stock beneficially owned by such stockholder; (iii) the name in which such shares are registered on the stock transfer books of the Corporation; (iv) a representation that such stockholder intends to appear at the meeting in person or by proxy to submit the business specified in such notice; (v) any material interest of such stockholder in the business to be submitted; and (vi) a brief description of the business desired to be submitted at the annual meeting, including the complete text of any resolutions to be presented at the annual meeting and the reasons for conducting such business at the annual meeting. In addition, the stockholder making such proposal shall promptly provide any other information reasonably requested by the Corporation.

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In addition to the information required above to be given by a stockholder who intends to submit business at a meeting of stockholders, if the business to be submitted is the nomination of a person or persons for election to the Board of Directors, then such stockholder’s notice must also set forth, as to each person whom such stockholder proposes to nominate for election as a director, (i) the name, age, business address and, if known, residential address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of stock of the Corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors or is otherwise required by the rules and regulations of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934, as amended, (v) the written consent of such person to be named in the proxy statement as a nominee and to serve as a director if elected, and (vi) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder.

Any person nominated for election as a director by the Board of Directors or any committee designated by the Board of Directors shall, upon the request of the Board of Directors or such committee, furnish to the Secretary of the Corporation all such information pertaining to such person that is required to be set forth in a stockholder’s notice of nomination.

Notwithstanding the foregoing provisions of this Section 11, a stockholder who seeks to have any proposal included in the Corporation’s proxy statement shall comply with the requirements of Regulation 14A of the Securities Exchange Act of 1934, as amended, at any time when such requirements are applicable pursuant thereto.

ARTICLE III

DIRECTORS

Section 1.    Powers and Number of Directors. The affairs, property and business of the Corporation shall be conducted and managed by a Board of Directors consisting of not less than 1 nor more than 15 directors. The exact number of directors shall be determined from time to time by resolution or resolutions adopted by affirmative vote of a majority of the entire Board of Directors which the Corporation would have if there were no vacancies. The directors shall be divided into three classes, designated Class I, Class II and Class III, as provided in the Certificate of Incorporation. The terms of directors shall be as provided in the Certificate of Incorporation.

Section 2.    Election of Directors. At each meeting of the stockholders for the election of directors, directors shall be elected by a majority of the votes represented in person or by proxy, provided that, at any such meeting at which

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the number of nominees exceeds the number of directors to be elected, the persons receiving the greatest number of votes shall be elected directors. Directors need not be stockholders.

Section 3.    Nominations. Nominations of persons for election to the Board of Directors may be made by the Board of Directors, any committee thereof, or by any stockholders entitled to vote for the election of directors at the applicable meeting of stockholders. Nominations made by stockholders must be made in accordance with the provisions of Section 11 of Article II of these Bylaws. Notice of nominations which are proposed by the Board of Directors shall be given on behalf of the Board of Directors by the chairman of the meeting. The chairman of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedure, and if the chairman should so determine, the chairman shall so declare at the meeting and the defective nomination shall be disregarded.

Section 4.    Resignations. Any director of the Corporation may resign at any time by giving written notice to the Chairman of the Board, or the Chief Executive Officer, the President and Chief Operating Officer or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and if no time is specified, at the time of its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 5.    Vacancies and Removal of Directors. Vacancies on the Board of Directors shall be filled, and directors may be removed, only as provided in the Certificate of Incorporation.

Section 6.    Place of Meeting. The Board of Directors may hold any of its meetings at the principal office of the Corporation or at such other place or places as the Board of Directors (or the Chairman of the Board in the absence of a determination by the Board of Directors) may from time to time designate.

Section 7.    Annual Meeting. An annual meeting of the Board of Directors shall be held each year at the same place as, and immediately after, the annual meeting of stockholders, or at such other place and time as shall theretofore have been determined by the Board of Directors and notice thereof need not be given. At its annual meeting, the Board of Directors shall organize itself and elect the officers of the Corporation for the ensuing year, and may transact any other business which may properly come before the meeting.

Section 8.    Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such intervals, at such time and at such place as shall from time to time be determined by resolution of the Board of Directors.

Section 9.    Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, the Chief Executive

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Officer, the President and Chief Operating Officer or by a majority of directors then in office to be held on such day and at such time and place as shall be specified by the person or persons calling the meeting.

Section 10.    Notice of Meeting. Notice of each special meeting or, where required, each regular meeting of the Board of Directors shall be given to each director either by being mailed on at least the third day prior to the date of the meeting or by being telegraphed, faxed or given personally or by telephone on at least 24 hours notice prior to the date of meeting. Such notice shall specify the place, the date and the hour of the meeting and, if it is for a special meeting, the purpose or purposes for which the meeting is called. At any meeting of the Board of Directors at which every director shall be present (unless any director shall be so present solely to protest the validity or legality of such meeting), even though without such notice, any business may be transacted. Any acts or proceedings taken at a meeting of the Board of Directors not validly called or constituted may be made valid and fully effective by ratification at a subsequent meeting which shall be legally and validly called or constituted. Notice of any regular meeting of the Board of Directors need not state the purpose of the meeting and, at any regular meeting duly held, any business may be transacted. If the notice of a special meeting shall state as a purpose of the meeting the transaction of any business that may come before the meeting, then at the meeting any business may be transacted, whether or not referred to in the notice thereof. A written waiver of notice of a special or regular meeting, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed the equivalent of such notice, and attendance of a director at a meeting shall constitute a waiver of notice of such meeting except when the director attends the meeting and prior to or at the commencement of such meeting protests the lack of proper notice.

Section 11.    Quorum and Voting. At all meetings of the Board of Directors, the presence of a majority of the directors then in office shall constitute a quorum for the transaction of business. Except as otherwise required by law, the Certificate of Incorporation or these Bylaws, the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. If at any meeting of the Board of Directors, less than a quorum is present, a majority of the directors present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by announcement at the adjourned meeting. At all meetings of the Board of Directors, each director shall have one vote.

Section 12.    Chairman of the Board. The Board of Directors may, from time to time, elect a Chairman of the Board from among its members by majority vote. If the Corporation has a Chairman of the Board, the Chairman of the Board shall preside at all meetings of the shareholders and Board of Directors, shall sign the record of such meetings at which the Chairman of the Board shall preside and shall have such other powers and duties as may be prescribed by the Board of Directors.

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Section 13.    Committees. The Board of Directors, by resolution passed by a majority of the entire board, may designate one or more committees of the Board of Directors. To the extent provided in the resolution and permitted by law, the committee or committees shall have and may exercise all powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it, but no committee shall have the power or authority to approve or adopt, or recommend to the stockholders of the Corporation, any matter expressly required by the DGCL to be submitted to stockholders for approval or adoption, amend or repeal any provision of these Bylaws or the Certificate of Incorporation. Any committee or committees shall have the name or names determined from time to time by resolution adopted by the Board of Directors. Any vacancy in a committee occurring from any cause whatsoever may be filled by the Board of Directors. Each committee shall serve at the pleasure of the Board of Directors and shall be subject to the control and direction of the Board of Directors. Any such committee may act by a majority of its members at a meeting of such committee. Any such committee shall keep written minutes of its meetings and report the same to the Board of Directors at the next regular meeting of the Board of Directors.

Section 14.    Compensation. The Board of Directors may, by resolution passed by a majority of those in office, fix the compensation of directors for service in any capacity and may fix fees for attendance at meetings and may authorize the Corporation to pay the traveling and other expenses of directors incident to their attendance at meetings, or may delegate such authority to a committee of the Board of Directors.

Section 15.    Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board of Directors or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or such committee.

Section 16.    Participation in Meeting by Telephone. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 15 shall constitute presence in person at such meeting.

ARTICLE IV

OFFICERS

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Section 1.     Officers. The officers shall be a President, Secretary, Treasurer and such other officers as the Board of Directors may appoint or elect or provide by resolution from time to time. If the Corporation has a Chief Executive Officer, the Chief Executive Officer must be a member of the Board of Directors. Any two or more of the offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity, if such instrument is required by law or by the Restated Certificate of Incorporation or Restated Bylaws to be executed, acknowledged or verified by two or more officers.

Section 2.    Election and Term of Office. The Chief Executive Officer and President shall be chosen by the Board of Directors and by the vote of the majority of the Board of Directors at the regular annual meeting of the Board. Such officers shall hold office until the date of the next annual meeting of the Board of Directors or until their respective successors are elected and qualified; provided, however, that any officer may be removed from office with or without cause at any time by a vote of at least two-thirds of the entire Board of Directors. If, for any cause, there is no regular annual meeting of the Board of Directors, or if such meeting is held and no one is elected or re-elected to one or more of such offices, the omitted election may be held in the manner above described at any other meeting of the Board of Directors if such meeting is duly called as a special meeting for that purpose or if each member of the Board of Directors shall be present or shall waive in writing the call and notice thereof. All other officers, assistant officers and agents of the Corporation shall be elected or appointed by the Board of Directors, or any committee of the Board of Directors to whom such authority has been delegated, and shall hold office for such period, have such authority and perform such duties as the Board of Directors or any such committee may from time to time determine. The Board of Directors may delegate to any officer the power to appoint any subordinate officers or agents.

Section 3.    Removal. Any officer of the Corporation may be removed from office at any time, for or without cause, by a vote of a majority of the Board of Directors. Any officer appointed not by the Board of Directors but by a committee or officer to which the Board of Directors shall have delegated the power of appointment may be removed, for or without cause, by the committee or superior officer (including successors) who made the appointment, or by any committee or officer upon whom such power of removal may be conferred by the Board of Directors.

Section 4.    Resignations. Any officer may resign at any time by giving written notice to the Chairman of the Board, the Chief Executive Officer, the President and Chief Operating Officer or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, and if no time is specified, at the time of its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

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Section 5.    Vacancies. Whenever a vacancy occurs in any office of the Corporation for any cause, the vacancy may be filled for the unexpired term by the vote of a majority of the Board of Directors present, if those present constitute a quorum thereof, or by the action of any committee of the Board of Directors to whom such authority has been delegated.

ARTICLE V

DUTIES OF OFFICERS

Section 1.    Chief Executive Officer. If the Corporation has a Chief Executive Officer, the Chief Executive Officer shall exercise general administrative leadership and direction of the Corporation in conformity with actions and controls established and maintained by the Board of Directors. The Chief Executive Officer shall, in compliance with the laws of the State of Delaware, the Restated Certificate of Incorporation and these Restated Bylaws, and in concurrence with the actions of the Board, direct the activities of its officers. The Chief Executive Officer shall have the power and authority to execute on behalf of the Corporation any and all documents, contracts, instruments or other papers to which the signature of the Corporation is to be attached; provided, however, a facsimile signature may be printed, engraved or stamped on any approved document, contract, instrument or other papers of the Corporation. The Chief Executive Officer shall exercise the discretion of and perform generally all of the duties incident to the Office of the Chief Executive Officer, and such other and further duties as may be from time to time required by the Board of Directors.

In the absence of the Chairman of the Board, or at the request thereof, the Chief Executive Officer shall preside at meetings of the shareholders and the Board of Directors, sign the record of such meetings at which the Chief Executive Officer shall preside and shall have such other powers and duties as may be prescribed by the Board of Directors.

In the absence of the Chief Executive Officer, another Director shall be selected by those Directors present to serve as temporary chairman, and shall be authorized to sign the records of meetings at which such Director presides.

Section 2.    President and Chief Operating Officer. The President and Chief Operating Officer shall be the chief operating officer of the Corporation and shall, in compliance with the laws of Delaware, the Certificate of Incorporation and these Bylaws, and in concurrence with the Chief Executive Officer and the actions of the Board of Directors, direct the activities of the officers of the Corporation. Except as provided for by resolution of the Board of Directors or by memorandum from the Chief Executive Officer, the President and Chief Operating Officer shall have the power and authority to execute on behalf of the Corporation any and all approved documents, contracts, instruments or other

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papers to which the signature of the Corporation is to be attached; provided, however, that a facsimile of his or her signature may be printed, engraved or stamped on any approved document, contract, instrument or other paper of the Corporation. The President and Chief Operating Officer shall exercise the discretion of and perform generally all of the duties incident to the office of President and Chief Operating Officer and such other and further duties as are conferred upon him or her by these Bylaws or may be assigned to him or her from time to time by the Board of Directors or the Chief Executive Officer.

Section 3.    Vice Presidents. The Vice Presidents, who may be designated Executive Vice President, Senior Vice President, Vice President or Associate Vice President, shall have such powers and perform such duties as are conferred upon them by these Bylaws or may be assigned to them from time to time by the Chief Executive Officer or the President and Chief Operating Officer and approved by the Board of Directors. The officer designated by the President and Chief Operating Officer and approved by the Chief Executive Officer shall act for the President and Chief Operating Officer upon his or her absence or disability.

Section 4.    Chief Legal and Governance Officer. The Chief Legal and Governance Officer shall furnish legal counsel on corporate matters as required; render legal opinions to the Board of Directors, the Chief Executive Officer, the President and Chief Operating Officer and the other officers and employees as requested; interpret all laws and regulations relating to the business of the Corporation; initiate recommendations with respect to legislation affecting the business of the Corporation; and shall perform such other and further duties as may be required by the Board of Directors, the Chief Executive Officer or the President and Chief Operating Officer.

Section 5.    Secretary. The Secretary shall: (i) issue notices and maintain the official records of all meetings of the stockholders and the Board of Directors and such records shall be attested by the Secretary or by such other person as shall have acted as secretary of such meeting in the case of the Secretary’s absence for any reason; (ii) have charge of the seal, share or other security books of the Corporation; and (iii) shall issue and attest all certificates of shares or other securities of the Corporation; provided, however, that a facsimile of his or her signature may be printed, engraved or stamped on certificates for shares, bonds or other securities of the Corporation when such certificates are countersigned by an incorporated transfer agent or registrar. In case a transfer agent or registrar of the shares or other securities of the Corporation shall be duly appointed by the Corporation, the Secretary may place in the charge of such transfer agent or registrar the seal and share or other security books of the Corporation and such transfer agent or registrar may perform in the Secretary’s stead all duties in connection with the shares of the Corporation. The Secretary shall have power and authority to sign or attest on behalf of the Corporation any and all approved documents, contracts, instruments or other papers where required in carrying on the business of the Corporation; provided, however, that a facsimile of his or her signature may be printed, engraved or stamped on any

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approved document, contract, instrument or other paper of the Corporation. The Secretary shall perform such other and further duties as are conferred upon him or her by these Bylaws or may be assigned to him or her from time to time by the Chief Executive Officer or the President and Chief Operating Officer and approved by the Board of Directors.

Section 6.    Treasurer. The Treasurer shall: (i) maintain custody of all funds, securities and properties of the Corporation; (ii) direct the receipt and deposit of all funds and securities and payment of all authorized disbursements; (iii) direct the administration of all accounting activities of the Corporation; (iv) furnish financial reports of the Corporation, as required; and (v) have the power and authority to sign or attest on behalf of the Corporation any and all approved documents, contracts, instruments or other papers where required in carrying on the business of the Corporation; provided, however, that a facsimile of his signature may be printed, engraved or stamped on any approved document, contract, instrument or other paper of the Corporation. The Treasurer shall perform such other and further duties as are conferred upon him or her by these Bylaws or may be assigned to him or her from time to time by the Chief Executive Officer or the President and Chief Operating Officer and approved by the Board of Directors.

Section 7.    Assistant Secretary. Any Assistant Secretary shall at all times act as an assistant to the Secretary and have such powers and perform such duties as are conferred upon him or her by these Bylaws or be assigned to him or her from time to time by the Secretary and approved by the Chief Executive Officer or the President and Chief Operating Officer. In case both the Secretary and all Assistant Secretaries are at the same time absent or unable to perform their duties, the Board of Directors may appoint a secretary pro tempore with the power and duty to act as Secretary during such absence or disability of the Secretary and the Assistant Secretaries.

Section 8.    Assistant Treasurer. Any Assistant Treasurer shall at all times act as an assistant to the Treasurer and shall have powers and perform such duties as are conferred upon him or her by these Bylaws or may be assigned to him or her from time to time by the Treasurer and approved by the Chief Executive Officer or the President and Chief Operating Officer.

Section 9.    Execution of Instruments. Any Vice President, any assistant secretary or assistant treasurer shall have the power and authority to sign any and all approved documents, contracts, instruments or other papers in connection with the operation of the business of the Corporation in addition to the Chief Executive Officer, the President and Chief Operating Officer, the Treasurer and the Secretary; provided, however, the facsimile signature of any of them may be printed, engraved or stamped on any approved document, contract, instrument or other paper of the Corporation.

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Section 10.    Bond of Officers and Employees. Any officer or employee of the Corporation handling funds or negotiable instruments or any other property of the Corporation shall furnish such bond or shall be covered by a blanket bond in such amounts and with such surety and sureties as may be required by the Board of Directors. The premium of any such bond shall be paid by the Corporation.

ARTICLE VI

INDEMNIFICATION

Section 1.    Indemnification. The Corporation shall indemnify, to the fullest extent permissible under the DGCL, or the indemnification provisions of any successor statute, any person, and the heirs and personal representatives of such person, against any and all judgments, fines, amounts paid in settlement and costs and expenses, including attorneys’ fees, actually and reasonably incurred by or imposed upon such person, in connection with, or resulting from any claim, action, suit or proceeding (civil, criminal, administrative or investigative) in which such person is a party or is threatened to be made a party by reason of such person being or having been a director, officer, employee or agent of the Corporation, or of another corporation, joint venture, trust or other organization in which such person serves as a director, officer, employee or agent at the request of the Corporation, or by reason of such person being or having been an administrator or a member of any board or committee of the Corporation or of any such other organization, including, but not limited to, any administrator, board or committee related to any employee benefit plan.

The Corporation may advance expenses incurred in defending a civil or criminal action, suit or proceeding to any such director, officer, employee or agent upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount, if it shall ultimately be determined that such person is not entitled to indemnification by the Corporation.

The foregoing right of indemnification and advancement of expenses shall in no way be exclusive of any other rights of indemnification to which any such person may be entitled, under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, and shall inure to the benefit of the heirs and personal representatives of such person. Any repeal or amendment of this Section 1 of Article VI by the Corporation shall be prospective only and shall not adversely affect any right of protection of a person with respect to any act or omission occurring prior to the time of such repeal or modification.

Section 2.    Reliance on Books and Records. Each director and officer and each member of any committee designated by the Board of Directors shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation or of any of its subsidiaries, or upon reports made to the Corporation or any of its subsidiaries

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by any officer of the Corporation or of a subsidiary or by an independent certified public accountant or by an appraiser selected with reasonable care by the Board of Directors or by any such committee.

Section 3.    Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of the person’s status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the DGCL.

ARTICLE VII

SHARES

Section 1.    Certificates of Shares. Each stockholder of the Corporation whose shares are paid in full shall be entitled to a certificate or certificates showing the number and class of shares registered in such stockholder’s name on the books of the Corporation. Certificates for the respective classes of shares of the Corporation shall be issued in numerical order and signed in the name of the Corporation by the Chairman of the Board, the Chief Executive Officer or the President and Chief Operating Officer and the Secretary or the Treasurer, or such other officers or persons as may be authorized by the Board of Directors and permitted by applicable law. The signature of any of said officers may be facsimile, engraved, stamped or printed when such certificates are countersigned by an incorporated transfer agent or registrar. A full record of each certificate as issued shall be entered on the stock record books of the Corporation. No new certificate shall be issued until the former certificate for the same number of shares shall have been surrendered and canceled, except as provided for in Section 3 of this Article VII. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she was such officer, transfer agent or registrar at the date of issue.

Section 2.    Transfer of Shares. Transfers of shares in the Corporation shall be made only on the books of the Corporation by the registered holder thereof, his legal guardian, executor or administrator, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent appointed by the Board of Directors, and on surrender of the certificate or certificates for such shares properly endorsed or accompanied by properly executed stock powers and evidence of the payment of all taxes imposed upon such transfer.

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Section 3.    Lost, Stolen, Destroyed or Mutilated Certificates. If any share certificate in this Corporation becomes worn, defaced or mutilated, the Secretary, upon presentation or surrender thereof, shall order the same canceled, and shall issue a new certificate in lieu thereof. If any share certificate is lost, stolen or destroyed, the Secretary shall issue a new certificate in lieu thereof to the person entitled to such lost, stolen or destroyed certificate upon receiving a bond of indemnity containing such terms as the Board of Directors may reasonably require to protect the Corporation or any person, firm or other corporation from loss, cost or damage resulting from the issue of such new certificate.

Section 4.    Holder of Record. The Corporation shall be entitled to treat the holder of record of any share or shares of the Corporation as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any person, whether or not the Corporation shall have express or other notice thereof, except as expressly provided by the laws of Delaware.

Section 5.    Transfer Agents and Registrars. The Board of Directors may appoint, or revoke the appointment of, transfer agents and registrars and may require all certificates for shares to bear the signatures of such transfer agents and registrars, or any of them. The Board of Directors shall have authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, and registration of certificates for shares of the Corporation.

ARTICLE VIII

FISCAL YEAR

Section 1.    Fiscal Year. The fiscal year of the Corporation shall be the calendar year ending December 31, unless otherwise fixed by resolution of the Board of Directors.

ARTICLE IX

SEAL

Section 1.    Seal. The corporate seal shall be circular in form and shall contain the name of the Corporation, the year of its creation and the words “CORPORATE SEAL Delaware.” Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

ARTICLE X

MISCELLANEOUS

Section 1.    Checks. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers or agent or agents of the

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Corporation, and in such manner, as shall be determined from time to time by resolution of the Board of Directors.

Section 2.    Notice and Waiver of Notice. Except as otherwise expressly provided herein, any notice required by these Bylaws to be given shall be sufficient if given by depositing the same in a post office or letter box in a sealed wrapper with first-class postage prepaid thereon and addressed to the person entitled thereto at such person’s address, as the same appears upon the books of the Corporation, or by faxing, telegraphing or cabling the same to such person at such address; and such notice shall be deemed to be given at the time it is faxed, telegraphed or cabled or at the time the mailing is received. Whenever any notice is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

ARTICLE XI

AMENDMENTS

Section 1.    By Stockholders. Except as otherwise provided in the Certificate of Incorporation, these Bylaws may be altered or amended at any meeting of the stockholders by affirmative vote of holders of a majority of the voting power of the shares entitled to vote thereon at such meeting.

Section 2.    By Directors. Except as otherwise provided in the Certificate of Incorporation, these Bylaws may be altered or amended at any meeting of the Board of Directors by affirmative vote of a majority of the Board of Directors.

Adopted: February 21, 2007

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EX-10.55

Exhibit 10.55

SHARE PURCHASE AGREEMENT

THIS SHARE PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of November 27, 2006, by and between Nationwide Corporation, an Ohio corporation (“Seller”) and Nationwide Financial Services, Inc., a Delaware corporation (the “Company”).

WHEREAS, Seller desires to sell to the Company, and the Company desires to purchase from Seller, a number of shares of the Company’s Class B common stock, par value US$.01 per share (the “Shares”), equal to $200,000,000 as determined pursuant to the formula set forth below and subject to the terms, conditions, promises, representations and warranties set forth herein; and

WHEREAS, the Company and Seller desire to set forth herein the terms and conditions of their agreements and understandings.

NOW, THEREFORE, in consideration of the foregoing, of the mutual promises herein contained and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby covenant and agree as follows:

1. Sale and Transfer of the Shares. Seller hereby sells, assigns, transfers, conveys and delivers the Shares to the Company.

2. Instruments of Conveyance and Transfer. On the Closing Date (as defined below) and subject to the delivery of the purchase price by the Company in accordance with Section 3, Seller shall deliver to the Company either (a) a stock certificate endorsed in blank or (b) a duly executed assignment separate from such certificate, in either case evidencing the transfer of the Shares, dated the date hereof, and in such form satisfactory to the Company as shall be effective to vest in the Company good and valid title to the Shares, free and clear of any option, call, contract, commitment, demand, lien, charge, security interest or encumbrance whatsoever. Seller shall at any time, and from time to time, after the date hereof, execute, acknowledge and deliver all further assignments, transfers, and any other such instruments of conveyance, upon the request of the Company, to confirm the sale of the Shares hereunder.

3. Number of Shares Delivered by Seller; Payment by the Company

(a) Shares to be Delivered. The number of Shares to be delivered to the Company shall be equal to US$200,000,000 divided by the Five Day Average Price (as defined below).

i. Five Day Average Price means the simple arithmetic average of the Daily Closing Price (as defined below) for the five (5) consecutive Trading Days (as defined below) commencing on the date of this Agreement, computed to two decimal places and rounded to the nearest whole Share.

ii. Daily Closing Price, for a particular Trading Day, means the closing price of a share of the Company’s Class A common stock for such Trading Day as reported by the New York Stock Exchange.

iii. Trading Day means any day on which the Company’s Class A common stock is purchased or sold on the New York Stock Exchange.

(b) Payment. On the sixth business day following the date of execution hereof (the “Closing Date”) and subject to the delivery of the Shares and applicable instruments of conveyance and transfer by the Seller in accordance with Sections 1 and 2 of this Agreement, the Company shall transmit to Seller an aggregate purchase price of US$200,000,000, by wire transfer or book entry transfer of immediately available funds.

4. Representations and Warranties of Seller. Seller represents and warrants that:

(a) Seller has the full, absolute and entire power and legal right to execute, deliver and perform this Agreement.

(b) The execution and delivery by Seller of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on part of Seller and when duly and validly executed, will constitute a legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles.

(c) The Shares are owned of record and beneficially by Seller, free and clear of any option, call, contract, commitment, demand, lien, charge, security interest or encumbrance whatsoever.

(d) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not violate or conflict with Seller’s articles of incorporation, its code of regulations or similar organizational documents.

(e) Seller represents that it (i) is a “qualified institutional buyer” within the meaning of Rule 144A promulgated under the Securities Act of 1933, as amended (the “Securities Act”), or an institutional “accredited investor” as that term is defined in Regulation D promulgated under the Securities Act (“Regulation D”) and has such knowledge, sophistication and experience in financial and business matters as to be capable of evaluating independently the merits, risks and suitability of entering into this Agreement and the transactions contemplated hereby, (ii) is able to bear the risks

attendant to the transactions contemplated hereby, and (iii) is dealing with the Company on a professional arm’s-length basis as defined in Regulation D.

5. Representations and Warranties of the Company. The Company represents and warrants that:

(a) The Company has the full, absolute and entire power and legal right to execute, deliver and perform this Agreement.

(b) The execution and delivery by the Company of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on part of the Company and when duly and validly executed, will constitute a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles.

(c) The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not violate or conflict with the Company’s certificate of incorporation, its bylaws or similar organizational documents.

6. Seller Acknowledgments. Seller acknowledges that:

(a) Seller has not relied upon any representations (whether oral or written) with respect to the Company or the Shares other than as set forth in this Agreement.

(b) Seller has had an opportunity to discuss the Company’s business, management and financial affairs with directors, officers and management of the Company. Seller has also had the opportunity to ask questions of and receive answers from, the Company and its management regarding the terms of this transaction. Seller believes that it has received all the information it considers necessary or appropriate for deciding whether to sell the Shares.

(c) Seller acknowledges and agrees that it has had a full and complete opportunity to consult internal or external legal, tax and business advisors and has in fact consulted such advisors as it has deemed appropriate with respect to this agreement and any matters contemplated hereunder. Seller further acknowledges that it has not engaged or employed any broker or finder in connection with the transactions referred to herein and that the sale and purchase of the Shares has been privately negotiated by the Seller and the Company.

7. Company Acknowledgments. The Company acknowledges that:

(a) The Company acknowledges and agrees that it has had a full and complete opportunity to consult internal or external legal, tax and business advisors and has in fact

consulted such advisors as it has deemed appropriate with respect to this agreement and any matters contemplated hereunder.

(b) The Company acknowledges that it has not engaged or employed any broker or finder in connection with the transactions referred to herein and that the sale and purchase of the Shares has been privately negotiated by the Company and the Seller.

8. Governing Law. This Agreement shall be construed in accordance with the laws of the State of Delaware.

9. Invalidity or Unenforceability. In case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

10. Benefits and Burdens. This Agreement is binding upon, and inures to the benefit of, the parties hereto and their respective estates, executors, administrators, legatees, heirs, and personal and legal representatives, successors and permitted assigns.

11. Change; Waiver. No change or modification of this Agreement shall be valid unless the same is in writing and signed by the parties hereto. No waiver of any provision of this Agreement shall be valid unless in writing and signed by the party waiving its rights. The failure of either party at any time to insist upon, or any delay by either party at any time to insist upon, strict performance of any condition, promise, agreement or understanding set forth herein shall not be construed as a waiver or relinquishment of the right to insist upon strict performance of the same condition, promise, agreement or understanding at a future time.

12. Entire Agreement. This Agreement sets forth all of the promises, agreement, conditions, understandings and covenants between the parties hereto with respect to the subject matter referred to herein, and there are no promises other than as set forth herein. Any and all prior agreements with respect to such subject matter are hereby revoked. This Agreement is, and is intended by the parties to be, an integration of any and all prior agreements or understandings, oral or written, with respect to such subject matter.

13. Headings. The headings and other captions in this Agreement are for convenience and reference only and shall not be used in interpreting, construing or enforcing any of the provisions of this Agreement.

14. Counterparts. This Agreement may be executed in any number of counterparts, which may be by facsimile, all of which counterparts taken together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

COMPANY:
NATIONWIDE FINANCIAL SERVICES, INC.
By:	/s/ Timothy G. Frommeyer
Name:	Timothy G. Frommeyer
Title:	Senior Vice President and Chief Financial Officer
SELLER:
NATIONWIDE CORPORATION
By:	/s/ Harry Hallowell
Name:	Harry Hallowell
Title:	Senior Vice President and Treasurer

EX-10.56

Exhibit 10.56

GUARANTY AGREEMENT

This Guaranty Agreement (this “Guaranty”) is made as of the 21th day of December, 2006, by Nationwide Financial Services, Inc., a Delaware corporation (“Guarantor”), in favor of The Charles Schwab Corporation, a Delaware corporation (“Buyer”).

WHEREAS, Guarantor is the sole stockholder of NFS Distributors, Inc., a Delaware corporation (“Seller”), and concurrently herewith Seller is entering into a stock purchase agreement, by and between Seller and Buyer, dated as of even date herewith (as modified, supplemented or amended from time to time, the “Stock Purchase Agreement”), a complete and correct copy of which is attached hereto as Exhibit A;

WHEREAS, Guarantor, as the sole stockholder of Seller, will receive a substantial benefit from the closing of the transactions contemplated by the Stock Purchase Agreement; and

WHEREAS, unless the context indicates otherwise, any capitalized term used and not defined in this Guaranty has the meaning given to such term in the Stock Purchase Agreement.

For good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and as a material inducement to Buyer to enter into and to close the transactions contemplated by the Stock Purchase Agreement, Guarantor hereby (i) absolutely, unconditionally and irrevocably guarantees to Buyer the payment and performance of the obligations of Seller set forth in Section 5.05 of the Stock Purchase Agreement, the payment of any Damages required to be paid by Seller under the provisions of Sections 11.02, 11.03 and 11.04 of the Stock Purchase Agreement and the payment of any amount required to be paid by Seller pursuant to Sections 2.03 and 8.05 of the Stock Purchase Agreement (collectively, the “Guaranteed Obligations”), and (ii) agrees to the covenants in connection with Sections 5.05 and 8.07 of the Stock Purchase Agreement upon the following terms and conditions:

1. Guaranty of Payment and Performance. Guarantor hereby absolutely, unconditionally and irrevocably guarantees to Buyer the timely payment and/or performance, as the case may be, of all of the Guaranteed Obligations upon such terms and in such amounts as is set forth in the Stock Purchase Agreement, in an amount not to exceed the Purchase Price.

2. Liability of Guarantor.

(a) Within 15 Business Days of receiving written notice from Buyer of a default of any Guaranteed Obligation, Seller shall provide written notice to Buyer (a “Required Response”) stating its intention to (i) pay, defend or dispute such Guaranteed Obligation, or (ii) refer such Guaranteed Obligation to the Guarantor for payment and/or performance.

(b) If Seller shall (i) elect to refer any Guaranteed Obligation to the Guarantor for payment and/or performance, (ii) fail to provide a Required Response within 15 Business Days, or (iii) default in the payment and/or performance of any Guaranteed Obligation, or any part thereof, following an election to pay, defend or dispute such Guaranteed Obligation, (A) Buyer shall provide to Guarantor written notice of the same in accordance with Section 6 hereof (the “Required Notice”) and (B) Guarantor shall, on demand and without presentment, protest

or any notice other the Required Notice, pay and/or perform, as the case may be, the Guaranteed Obligations described in the Required Notice, subject to Section 2(c) of this Guaranty.

(c) Guarantor waives all rights, demands or defenses to the payment or performance of the obligations described in the Required Notice, including without limitation any right to revoke this Guaranty as to future events giving rise to the Guaranteed Obligations, except as set forth in Sections 2(a) and 2(b), any right to require Buyer to proceed first or exhaust remedies against Seller and any right to receive notice of or approve any modification to the Guaranteed Obligations; provided, however, notwithstanding the preceding, that Guarantor shall be entitled to assert any defenses to payment or performance of the Guaranteed Obligations that Seller may be entitled to assert with respect to its obligations provided under (i) the Stock Purchase Agreement or (ii) applicable law.

3. 338(h)(10) Election. As set forth in Section 8.07 of the Stock Purchase Agreement and in connection with the sale of the Company Shares to Buyer, Guarantor agrees to join with Buyer in making the election provided for in Section 338(h)(10) of the Code and the regulations promulgated thereunder, and any similar state statute or regulation, and will comply fully with all filing and other requirements necessary to effectuate such elections on a timely basis. Guarantor agrees to cooperate in good faith with Buyer in the preparation and timely filing of any Tax Returns required to be filed in connection with the making of any such elections, including the exchange of information and the joint preparation and filing of Form 8023 (including related schedules). Guarantor is not aware of any fact, reason or circumstance that would preclude the parties from making the election under Section 338(h)(10) as contemplated in the Stock Purchase Agreement. Guarantor agrees that any income and gain recognized as a result of, and in accordance with, the making of the Section 338(h)(10) election will be included in the consolidated federal income tax return of Guarantor’s consolidated group and any resulting tax liability will be paid by Guarantor, as the common parent of the consolidated group which includes Seller.

4. No Solicitation and Nonsolicitation of Employees and Clients and Noncompetition. Guarantor agrees that Guarantor, and its directly and indirectly controlled Subsidiaries, shall be subject to the provisions of Section 5.05 of the Stock Purchase Agreement in the same manner as such section applies to Seller and its Affiliates.

5. Successors and Assigns. This Guaranty is for the benefit of Buyer and its successors and assigns, and in the event of an assignment of the Guaranteed Obligations, or any part thereof, the rights and benefits hereunder, to the extent applicable to the Guaranteed Obligations so assigned, may be transferred with such Guaranteed Obligations. Buyer shall provide Guarantor 30 days prior written notice of any transfer or assignment by Buyer of the Guaranteed Obligations, or any part thereof. Guarantor shall obtain the prior written consent of Buyer for any transfer or assignment of this Guaranty by Guarantor, which consent shall not be unreasonably withheld; provided, however, Buyer shall have the right to evaluate the financial position and prospects of any proposed transferee or assignee prior to granting consent and Buyer shall not be deemed to have unreasonably withheld consent to any transfer or assignment if Buyer reasonably determines that any such transferee or assignee has a financial position or prospects that are materially weaker than Guarantor’s.

6. Notices. The provisions of Section 13.01 of the Stock Purchase Agreement shall apply to any notice provided pursuant to this Guaranty with any such notice to be provided to the Guarantor at the address set forth below the Guarantor’s signature provided herein.

7. Binding Effect. This Guaranty is binding not only on Guarantor, but also on Guarantor’s successors and assigns. Upon the assignment of this Guaranty by Guarantor of this Guaranty to a third party assignee in the manner permitted by Section 5, and assumption by such party of all obligations hereunder, Guarantor shall be released from all obligations set forth herein.

8. Governing Law; Dispute Resolutions; Jurisdiction. The provisions of Section 13.05, 13.06 and 13.07 of the Stock Purchase Agreement shall apply to this Guaranty.

9. Term of Guaranty. The provisions of Section 1 of this Guaranty shall continue in effect until all the Guaranteed Obligations are fully and finally paid, performed, and discharged, except that, and notwithstanding any return of the Guaranty to Guarantor, the Guaranty shall continue in effect with respect to any of the Guaranteed Obligations that survive a partial discharge of the Guaranteed Obligations. The provisions of Section 4 of this Guaranty shall continue in effect until the applicable expiration, amendment or termination of the obligations set forth in Section 5.05 of the Stock Purchase Agreement.

10. Authority. Guarantor is a holding company duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. Guarantor has the requisite corporate power and authority to enter into this Guaranty. The execution and delivery of this Guaranty by Guarantor has been duly authorized by all necessary corporate action on the part of Guarantor. This Guaranty has been duly executed and delivered by Guarantor and constitutes a valid and binding obligation of Guarantor, enforceable against Guarantor in accordance with its terms, except that (a) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors’ rights generally and (b) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefore may be brought.

11. Further Assurances. Guarantor will promptly execute and deliver to Buyer upon Buyer’s request all such documents, agreements and instruments in compliance with or accomplishment of the agreements of Guarantor under this Guaranty as Buyer may reasonably request from time to time. Any expenses incurred by Guarantor pursuant to this Section 11 shall be allocated evenly among Guarantor and Buyer.

12. Amendment. This Guaranty may be amended only by a writing signed by Guarantor and Buyer.

13. Entire Agreement. This Guaranty and the applicable provisions of Sections 2.03, 5.05, 8.05, 8.07, 11.02, 11.03, 11.04, 13.01, 13.05, 13.06 and 13.07 of the Stock Purchase Agreement embody the entire agreement between Buyer and Guarantor with respect to the Guaranteed Obligations. This Guaranty supersedes all prior agreements and understandings, if

any, with respect to the guaranty by Guarantor of the Guaranteed Obligations. Other than execution by Guarantor, no condition or conditions precedent to the effectiveness of this Guaranty exist. This Guaranty shall be effective upon execution by Guarantor and delivery to Buyer.

[Signature Page to Follow]

IN WITNESS WHEREOF, Guarantor has duly executed this Guaranty as of the date first written above.

NATIONWIDE FINANCIAL SERVICES, INC.

By:

Name:

Title:

Address, if to Guarantor:

Nationwide Financial Services, Inc.

One Nationwide Plaza, 1-12-09

Columbus, Ohio 43215

Attention:       Timothy Frommeyer

                       Senior Vice President

                       Chief Financial Officer

with a copy (which shall not constitute notice) to:

Nationwide Financial Services, Inc.

One Nationwide Plaza, 1-35-16

Columbus, Ohio 43215

Attention:       Roger A. Craig

                       Vice President

                       Division General Counsel

EX-10.57

Exhibit 10.57

10/31/2006

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (the “Agreement”) is entered into as of October 16, 2006, by and between Nationwide Mutual Insurance Company (the “Company”) and James Lyski (“Executive”).

WHEREAS, the parties desire to enter into an agreement to reflect Executive’s executive capacities in the Company’s business and to provide for Executive’s employment by the Company, upon the terms and conditions set forth herein.

WHEREAS, Executive has agreed to certain confidentiality, non-competition and non-solicitation covenants contained hereunder, in consideration of the additional benefits provided to Executive under this Agreement.

WHEREAS, certain capitalized terms shall have the meanings given those terms in Section 5 of this Agreement.

NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:

1. Employment. The Company hereby agrees to employ Executive, and Executive hereby accepts such employment and agrees to perform Executive’s duties and responsibilities, in accordance with the terms, conditions and provisions hereinafter set forth.

1.1 Employment Term. This Agreement shall be effective as of the date set forth above, and shall continue until December 31, 2007, unless the Agreement is terminated sooner in accordance with Section 2 or 3 below. In addition, the term of the Agreement shall automatically renew for periods of one year unless either party gives written notice to the other party, at least 60 days prior to the end of the initial term or at least 60 days prior to the end of any one-year renewal period, that the Agreement shall not be further extended. The period commencing on the effective date and ending on the date on which the term of Executive’s employment under the Agreement shall terminate is hereinafter referred to as the “Employment Term.” If a Change of Control (as defined in Section 5) occurs, the Employment Term shall be automatically extended to the later of (i) the end of the then existing initial or renewal period or (ii) the date that is two years after the Change of Control, unless the Employment Term is sooner terminated according to Section 2 or 3 below. The failure of the Company to renew this Agreement shall not be considered a termination of Executive’s employment under this Agreement and shall not give Executive grounds to terminate employment for Good Reason (as defined in Section 5) under this Agreement.

1.2 Duties and Responsibilities. During the Employment Term, Executive shall serve as the Chief Marketing Officer of the Company, or in such other executive positions as the Board of Directors of the Company (the “Board”) determines. Executive shall perform all duties and accept all responsibilities incident to such position or as may be reasonably assigned to him by the Chief Executive Officer of the Company or the Board.

1.3 Extent of Service. During the Employment Term, Executive agrees to use Executive’s full and best efforts to carry out Executive’s duties and responsibilities under Section 1.2 hereof with the highest degree of loyalty and the highest standards of care and, consistent with the other provisions of this Agreement, Executive agrees to devote substantially all of Executive’s business time, attention and energy thereto. The foregoing shall not be construed as preventing Executive from making investments in other businesses or enterprises, provided that Executive agrees not to become engaged in any other business activity which, in the reasonable judgment of the Board, is likely to interfere with Executive’s ability to discharge Executive’s duties and responsibilities to the Company. The Executive will not serve on the board of directors of an entity unrelated to the Company (other than a non-profit charitable organization) without the consent of the Board.

1.4 Base Salary. During the Employment Term, for all the services rendered by Executive hereunder, the Company shall pay Executive a base salary (“Base Salary”), at the annual rate in effect on the date of this Agreement, payable in installments at such times as the Company customarily pays its other employees. Executive’s Base Salary shall be reviewed periodically for appropriate increases by the Board (or a committee of the Board) pursuant to the Board’s normal performance review policies for senior level executives.

1.5 Retirement, Welfare and Other Benefit Plans and Programs. During the Employment Term, Executive shall be entitled to participate in all employee retirement and welfare benefit plans and programs made available to the Company’s senior level executives as a group, as such retirement and welfare plans may be in effect from time to time and subject to the eligibility requirements of such plans. During the Employment Term, Executive shall be provided with executive fringe benefits and perquisites under the same terms as those made available to the Company’s senior level executives as a group, as such programs may be in effect from time to time. During the Employment Term, Executive shall be entitled to vacation and sick leave in accordance with the Company’s vacation, holiday and other pay for time not worked policies. Nothing in this Agreement or otherwise shall prevent the Company from amending or terminating any retirement, welfare or other employee benefit plans, programs, policies or perquisites from time to time as the Company deems appropriate.

1.6 Reimbursement of Expenses. During the Employment Term, Executive shall be provided with reimbursement of reasonable expenses related to Executive’s employment by the Company on a basis no less favorable than that which may be authorized from time to time for senior level executives as a group.

1.7 Incentive Compensation. During the Employment Term, Executive shall be entitled to participate in all short-term and long-term incentive programs established by the Company for its senior level executives generally, at levels commensurate with the benefits provided to other senior executives and Executive’s position with the Company. Executive’s incentive compensation shall be subject to the terms of the applicable plans and shall be determined based on Executive’s individual performance and Company performance as determined by the Board (or a committee of the Board).

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2. Termination. Executive’s employment shall terminate upon the occurrence of any of the following events:

2.1 Termination Without Cause. The Company (by action of the Board) may remove Executive at any time without Cause (as defined in Section 5) from the position in which Executive is employed hereunder (in which case the Employment Term shall be deemed to have ended) upon not less than 60 days’ prior written notice pursuant to Section 17 to Executive; provided, however, that, in the event that such notice is given, Executive shall be under no obligation to render any additional services to the Company and shall be allowed to seek other employment, to the extent such other employment is consistent with Executive’s obligations under Section 8.

2.2 Resignation for Good Reason After a Substantial Reorganization. If the Board determines for purposes of this Agreement that a substantial reorganization of the Company has occurred, the Board may establish a period of time during which Executive may elect to resign if an event constituting Good Reason (as defined in Section 5) occurs. In that event, Executive may initiate termination of employment by resigning under this Section 2.2 for Good Reason during the period specified by the Board. Executive shall give the Company not less than 60 days prior written notice pursuant to Section 17 of such resignation. A substantial reorganization shall not be considered to have occurred unless the Board specifically determines that a substantial reorganization has occurred for purposes of this Agreement and the Board establishes a time period during which Executive may elect to resign if an event constituting Good Reason occurs. Nothing in this Agreement shall obligate the Board to make any such determination.

2.3 Benefits Payable Upon Termination Without Cause or Resignation for Good Reason After a Substantial Reorganization.

(a) Upon any removal or resignation described in Section 2.1 or 2.2 above, Executive shall be entitled to receive only the amount due to Executive under the Company’s then current severance pay plan for employees, if any. No other payments or benefits shall be due under this Agreement to Executive, but Executive shall be entitled to any benefits accrued or earned in accordance with the terms of any applicable benefit plans and programs of the Company.

(b) Notwithstanding the provisions of Section 2.3(a), in the event of a removal or resignation described in Section 2.1 or 2.2 during the Employment Term, if Executive executes and does not revoke a written release and waiver of claims upon such removal or resignation, in form and substance acceptable to the Company (the “Release”), of any and all claims against the Company and all related parties with respect to all matters arising out of Executive’s employment by the Company, or the termination thereof (other than claims based upon any severance entitlements under the terms of this Agreement or entitlements under any plans or programs of the Company under which Executive has accrued a benefit), Executive shall be entitled to receive the severance benefits described below, in lieu of the payment described in Section 2.3(a).

(i) Executive shall receive a lump sum cash payment equal to two times Executive’s annual Base Salary in effect immediately before the Termination Date

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(including salary reduction amounts of Base Salary under the Company’s benefit plans and programs).

(ii) Executive shall receive Executive’s annual short-term incentive bonus (PIP) for the year in which Executive’s Termination Date occurs, at the time that annual bonuses for the year are paid to other executives, based on the Company’s actual performance for the year, but in an amount not less than Executive’s target annual bonus in effect for the year.

(iii) The Company shall pay Executive a lump sum cash payment equal to the cost that Executive would incur if Executive continued medical and dental coverage under COBRA or the Company’s retiree medical plan, if applicable, for Executive, and, where applicable, his or her spouse and dependents, for the Severance Period (as defined in Section 5). The cash payment shall include a tax gross up to cover Executive’s income taxes imposed on the payment under this subsection (iii). Executive may elect COBRA continuation coverage according to the terms of the Company’s applicable benefit plans, for the period permitted under such plans.

(iv) Executive shall receive the following lump sum payments with respect to the long-term incentive awards (LTPP) in effect for Executive at his or her Termination Date:

(A) Executive shall receive a pro rated portion of each outstanding long-term incentive award for which Executive’s Termination Date does not occur in the final year of the award period (for example, if the award period is three years, the awards for which the Termination Date occurs in year one or two). The pro rated payment for each such long-term incentive award shall be computed as the target incentive award in effect for Executive multiplied by a fraction, the numerator of which is the number of years that the incentive award has been outstanding (including the year in which the Termination Date occurs as a whole year) and the denominator of which is the number of years in the incentive award period. The payment shall be made on the lump sum payment date described in subsection (xiv) below.

(B) Executive shall receive each long-term incentive award for which Executive’s Termination Date occurs in the final year of the award period, at the time that such long-term incentive awards are paid to other executives under the long-term incentive plan, based on the Company’s actual performance for the award period, but in an amount not less than Executive’s target long-term incentive award in effect for such period.

The foregoing payments shall be made under the Company’s long-term incentive plan, to the extent consistent with the terms of such plan. If the payments calculated above exceed the payments actually made to Executive under the Company’s long-term incentive plan with respect to the foregoing awards, any such excess amount shall be paid to Executive under this Agreement.

(v) Executive’s outstanding stock options and restricted stock with respect to stock of Nationwide Financial Services, Inc. or any Affiliate of the Company which

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are granted after the date of this Agreement shall become vested and exercisable on the Termination Date to the extent that such options and restricted stock would have become vested and exercisable on the next vesting date had Executive remained an employee of the Company. All other unvested stock options and restricted stock shall be forfeited, except to the extent that the applicable grant agreement requires otherwise. No additional grants shall be made to Executive after Executive’s termination of employment.

(vi) Executive shall receive supplemental benefits under this Agreement equal to:

(A) the benefits that Executive would have received under the Nationwide Retirement Plan, Nationwide Supplemental Retirement Plan, Nationwide Excess Benefit Plan, Nationwide Savings Plan, Nationwide Supplemental Defined Contribution Plan and Nationwide Individual Deferred Compensation Plan, as in effect at Executive’s Termination Date, had Executive’s benefits under those Plans been fully vested as of Executive’s Termination Date, reduced by

(B) the benefits that Executive actually receives under the Nationwide Retirement Plan, Nationwide Supplemental Retirement Plan, Nationwide Excess Benefit Plan, Nationwide Savings Plan, Nationwide Supplemental Defined Contribution Plan and Nationwide Individual Deferred Compensation Plan.

The benefits under this subsection (vi) shall be paid as described in Section 10. The benefits payable under this subsection (vi) and subsection (vii) below shall not result in any duplication of benefits.

(vii) If Executive’s Termination Date occurs within three years of the date on which Executive would have been first eligible to retire under the Nationwide Retirement Plan, Executive shall receive a supplemental benefit under this Agreement equal to:

(A) the benefits that Executive would have received under the Nationwide Retirement Plan, Nationwide Supplemental Retirement Plan and Nationwide Excess Benefit Plan as in effect at Executive’s Termination Date, had Executive earned service and age credit for the period ending on the first to occur of (i) three years after the Termination Date or (ii) the earliest date on which Executive would have been eligible to retire under the Nationwide Retirement Plan, and had Executive been fully vested in Executive’s benefit under such Plans, reduced by

(B) the benefits that Executive actually receives under the Nationwide Retirement Plan, Nationwide Supplemental Retirement Plan and Nationwide Excess Benefit Plan, and the benefits payable under subsection (vi) above with respect to the Nationwide Retirement Plan, Nationwide Supplemental Retirement Plan and Nationwide Excess Benefit Plan.

The benefits under this subsection (vii) shall be paid as described in Section 10. The benefits payable under this subsection (vii) and subsection (vi) above shall not result in any duplication of benefits.

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(viii) The Company shall pay Executive a lump sum cash payment equal to the matching contributions that the Company would have made for Executive under the Nationwide Savings Plan and the Nationwide Supplemental Defined Contribution Plan, as in effect at Executive’s Termination Date, as if Executive continued in employment for the Severance Period, receiving compensation at a rate equal to Executive’s covered compensation amount for the calendar year prior to the year in which the Termination Date occurs and as if Executive continued the same rate of contributions to the applicable plans as in effect immediately before Executive’s Termination Date.

(ix) The Company shall cause Executive to receive service and age credit for purposes of eligibility under the Company’s retiree medical plan, and service credit for purposes of cost-sharing, until the end of the Severance Period, as if Executive had continued in employment during the Severance Period.

(x) During the Severance Period, the Company shall pay or reimburse Executive for the cost of reasonable outplacement assistance services (not to exceed a total of $11,000) provided by any outplacement agency selected by Executive.

(xi) The Company shall pay Executive a lump sum cash payment equal to the annual value of the financial counseling services provided by the Company to Executive immediately before Executive’s Termination Date, multiplied by the number of years in the Severance Period.

(xii) Executive shall have the right to retain the computer, printer, fax machine and office furniture that was provided by the Company for use by Executive at Executive’s residence at the Termination Date.

(xiii) Executive shall receive any other amounts earned, accrued or owing but not yet paid under Section 1 above and any other benefits in accordance with the terms of any applicable plans and programs of the Company.

(xiv) Except as otherwise required by Section 4, payment of the lump sum benefits described above (other than as described in subsections (ii) and (iv) above) shall be made within 30 days after Executive’s Termination Date (as defined in Section 5) or the end of the revocation period for the Release, if later. The Company shall provide the Release to Executive on or before the Termination Date.

2.4 Retirement or Other Voluntary Termination. Executive may voluntarily terminate employment for any reason, including voluntary retirement, upon 60 days’ prior written notice pursuant to Section 17. In such event, after the effective date of such termination, except as provided in Section 2.2 or 3.3 (with respect to a resignation for Good Reason), no further payments shall be due under this Agreement. However, Executive shall be entitled to any benefits due in accordance with the terms of any applicable benefit plans and programs of the Company.

2.5 Disability. The Company (by action of the Board) may terminate Executive’s employment if Executive has been unable to perform the essential functions of Executive’s position with the Company, with or without reasonable accommodation, by reason of physical or

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mental incapacity for a period of six consecutive months (“Disability”); provided, however, that the Company shall continue to pay Executive’s Base Salary until the Company acts to terminate Executive’s employment. Executive agrees, in the event of a dispute under this Section 2.5 relating to Executive’s Disability, to submit to a physical examination by a licensed physician selected by the Board. Executive acknowledges that the provisions of this Section 2.5 supersede the employment termination provisions otherwise applied to disabled employees. If Executive’s employment terminates on account of Disability, no further payments shall be due under this Agreement. However, Executive shall be entitled to (i) any benefits due in accordance with the terms of any applicable benefit plans and programs of the Company and (ii) a pro rated bonus for the year in which Executive’s Disability occurs, which bonus shall be calculated and paid according to Section 2.3(b)(ii) above.

2.6 Death. If Executive dies while employed by the Company, the Company shall pay to Executive’s executor, legal representative, administrator or designated beneficiary, as applicable, (i) any amounts earned, accrued or owing but not yet paid under Section 1 above and any benefits accrued or earned under the Company’s benefit plans and programs according to the terms of such plans and (ii) a pro rated bonus for the year in which Executive’s death occurs, which bonus shall be calculated and paid according to Section 2.3(b)(ii) above. Otherwise, the Company shall have no further liability or obligation under this Agreement to Executive’s executors, legal representatives, administrators, heirs or assigns.

2.7 Cause. The Company (by action of the Board) may terminate Executive’s employment at any time for Cause upon written notice to Executive, in which event all payments under this Agreement shall cease, except for Base Salary to the extent already accrued. Executive shall be entitled to any benefits accrued or earned before Executive’s termination in accordance with the terms of any applicable benefit plans and programs of the Company; provided that Executive shall not be entitled to receive any unpaid short-term or long-term cash incentive payments or unvested options.

3. Change of Control.

3.1 Effect of Change of Control. If a Change of Control occurs and Executive’s employment terminates under the circumstances described below, the provisions of this Section 3 shall apply, instead of the provisions of Section 2.1, 2.2 and 2.3.

3.2 Termination Without Cause Upon or After a Change of Control. Upon or after a Change of Control, the Company (by action of the Board) may remove Executive at any time without Cause from the position in which Executive is employed hereunder (in which case the Employment Term shall be deemed to have ended) upon not less than 60 days prior written notice pursuant to Section 17 to Executive; provided, however, that, in the event that such notice is given, Executive shall be under no obligation to render any additional services to the Company and shall be allowed to seek other employment, to the extent such other employment is consistent with Executive’s obligations under Section 8.

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3.3 Resignation for Good Reason Upon or After a Change of Control. Upon or after a Change of Control, Executive may initiate termination of employment by resigning under this Section 3 for Good Reason (as defined in Section 5). Executive shall give the Company not less than 60 days’ prior written notice pursuant to Section 17 of such resignation.

3.4 Benefits Payable Upon Termination Without Cause or Resignation for Good Reason Upon or After a Change of Control.

(a) Upon any removal or resignation described in Section 3.2 or 3.3 above, Executive shall be entitled to receive only the amount due to Executive under the Company’s then current severance pay plan for employees, if any. No other payments or benefits shall be due under this Agreement to Executive, but Executive shall be entitled to any benefits accrued or earned in accordance with the terms of any applicable benefit plans and programs of the Company.

(b) Notwithstanding the provisions of Section 3.4(a), in the event of a removal or resignation described in Section 3.2 or 3.3 that occurs upon or after a Change of Control and during the Employment Term, if Executive executes and does not revoke a written Release upon such removal or resignation, Executive shall be entitled to receive the severance benefits described below, in lieu of the payment described in Section 3.4(a).

(i) Executive shall receive a lump sum cash payment equal to three times Executive’s Compensation (as defined in Section 5).

(ii) Executive shall receive Executive’s annual short-term incentive bonus (PIP) for the year in which Executive’s Termination Date occurs, at the time that annual bonuses for the year are paid to other executives, based on the Company’s performance for the year, but in an amount not less than Executive’s target annual bonus in effect for the year in which the Termination Date occurs.

(iii) The Company shall pay Executive a lump sum cash payment equal to the cost that Executive would incur if Executive continued medical and dental coverage under COBRA or the Company’s retiree medical plan, if applicable, for Executive, and, where applicable, Executive’s spouse and dependents, for the Severance Period. The cash payment shall include a tax gross up to cover Executive’s income taxes imposed on the payment under this subsection (iii). Executive may elect COBRA continuation coverage according to the terms of the Company’s applicable benefit plans, for the period permitted under such plans.

(iv) Executive shall receive a lump sum payment equal to the long-term incentive awards (LTPP) in effect for Executive on the Termination Date based on the Company’s actual performance through the Termination Date, but in an amount not less than the total target long-term incentive awards in effect for Executive on the Termination Date. The payment shall be made on the lump sum payment date described in subsection (xiv) below. The payment shall be made under the Company’s long-term incentive plan, to the extent consistent with the terms of such plan. If the payment calculated above exceeds the payment actually made to Executive under the Company’s long-term incentive plan with respect to the foregoing awards, any such excess benefit shall be paid to Executive under this Agreement.

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(v) All stock options and restricted stock with respect to stock of Nationwide Financial Services, Inc. or any Affiliate of the Company that are held by Executive and are granted after the date of this Agreement shall become fully vested and exercisable as of the Termination Date (if not already vested and exercisable pursuant to the terms of the applicable plan).

(vi) Executive shall receive a supplemental benefit under this Agreement equal to:

(A) the benefits that Executive would have received under the Nationwide Savings Plan, Nationwide Supplemental Defined Contribution Plan and Nationwide Individual Deferred Compensation Plan, as in effect immediately before the Change of Control, had Executive’s benefits under those Plans been fully vested as of Executive’s Termination Date, reduced by

(B) the benefits that Executive actually receives under the Nationwide Savings Plan, Nationwide Supplemental Defined Contribution Plan and Nationwide Individual Deferred Compensation Plan.

The benefits under this subsection (vi) shall be paid as described in Section 10. The benefits payable under this subsection (vi) and subsection (vii) below shall not result in any duplication of benefits.

(vii) Executive shall receive a supplemental benefit under this Agreement equal to:

(A) the benefits that Executive would have received under the Nationwide Retirement Plan, Nationwide Supplemental Retirement Plan and Nationwide Excess Benefit Plan, had Executive received credit for eligibility age, compensation and benefit accrual purposes during the Severance Period under the Nationwide Retirement Plan, Nationwide Supplemental Retirement Plan and Nationwide Excess Benefit Plan, each as in effect immediately before the Change of Control, calculated as if Executive had continued in employment during the Severance Period, receiving compensation at the same times as compensation is normally paid and in amounts equal to the Compensation, and as if Executive had been fully vested in Executive’s benefits under such Plans, reduced by

(B) the benefits that Executive actually receives under the Nationwide Retirement Plan, Nationwide Supplemental Retirement Plan and Nationwide Excess Benefit Plan.

The benefits under this subsection (vii) shall be paid as described in Section 10. The benefits payable under this subsection (vii) and subsection (vi) above shall not result in any duplication of benefits.

(viii) The Company shall pay Executive a lump sum cash payment equal to the matching contributions that the Company would have made for Executive under the Nationwide Savings Plan and the Nationwide Supplemental Defined Contribution Plan, as in

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effect immediately before the Change of Control, had Executive continued in employment for the Severance Period receiving Executive’s Compensation and making the same level of contributions to the applicable plans as in effect immediately before Executive’s Termination Date.

(ix) The Company shall cause Executive to receive service and age credit for purposes of eligibility, and service credit for purposes of cost-sharing, under the Company’s retiree medical plan until the end of the Severance Period, as if Executive had continued in employment during that period.

(x) During the Severance Period, the Company shall pay or reimburse Executive for the cost of reasonable outplacement assistance services (not to exceed a total of $11,000) provided by any outplacement agency selected by Executive.

(xi) The Company shall pay Executive a lump sum cash payment equal to the annual value of the financial counseling services provided by the Company to Executive immediately before the Change of Control, multiplied by the number of years in the Severance Period.

(xii) Executive shall have the right to retain the computer, printer, fax machine and office furniture that was provided by the Company for use by Executive at Executive’s residence at the Termination Date.

(xiii) Executive shall receive any other amounts earned, accrued or owing but not yet paid under Section 1 above and any other benefits in accordance with the terms of any applicable plans and programs of the Company.

(xiv) Except as otherwise required by Section 4 below, payment of the lump sum benefits described above (other than as described in subsection (ii) above) shall be made within 30 days after Executive’s Termination Date or the end of the revocation period for the Release, if later. The Company shall provide the Release to Executive on or before the Termination Date.

3.5 Increase in Payments Upon a Change of Control.

(a) Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a “Payment”), would constitute an “excess parachute payment” within the meaning of Section 280G of the Code, the Company shall pay Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by Executive after deduction of any Excise Tax (as defined below), and any federal, state and local income tax, employment tax and Excise Tax imposed upon the Gross-Up Payment, shall be equal to the Payment. The term “Excise Tax” means the excise tax imposed under section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax. For purposes of determining the amount of the Gross-Up Payment, unless Executive specifies that other rates apply, Executive shall be deemed to pay federal income tax and employment taxes at the highest marginal rate of federal income and employment taxation in the calendar year in which the

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Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive’s residence on Executive’s Termination Date, net of the maximum reduction in federal income taxes that may be obtained from the deduction of such state and local taxes.

(b) All determinations to be made under this Section 3.5 shall be made by the Company’s independent public accounting firm immediately prior to the Change of Control or another independent public accounting firm selected by the Company prior to the Change of Control (the “Accounting Firm”). The Accounting Firm shall provide its determinations and any supporting calculations both to the Company and Executive within 20 days after the Change of Control. Any such determination by the Accounting Firm shall be binding upon the Company and Executive.

(c) Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after Executive knows of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall:

(i) give the Company any information reasonably requested by the Company relating to such claim,

(ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

(iii) cooperate with the Company in good faith in order to contest such claim effectively, and

(iv) permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax, including interest and penalties, with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 3.5, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearing and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a

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termination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine. If the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance. Any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due shall be limited solely to such contested amount. The Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

(d) If, after the receipt by Executive of an amount advanced by the Company pursuant to this Section, Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company’s complying with the requirements of subsection (c)) promptly pay to the Company the amount of such refund, together with any interest paid or credited thereon after taxes applicable thereto. If, after the receipt by Executive of an amount advanced by the Company pursuant to this Section 3.5, a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

(e) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections (b), (c) and (d) above shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Accounting Firm from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to subsections (b), (c) and (d) above, except for claims, damages or expenses resulting from the gross negligence or wilful misconduct of the Accounting Firm.

(f) The Company shall pay the Gross-Up Payment as and when the related Excise Tax is incurred. The Gross-Up Payment shall be paid in accordance with Section 409A of the Code, to the extent applicable. If required in order to comply with Section 409A of the Code, (i) the Gross-Up Payment attributable to Payments other than severance compensation and benefits described in Section 2 or 3 shall be paid in a lump sum payment upon the closing of the Change in Control, subject to Section 4 below, if applicable, and (ii) the Gross-Up Payment attributable to severance compensation and benefits shall be paid in a lump sum payment on the first day on which severance compensation is paid pursuant to Section 2 or 3. If the amount of a Gross-Up Payment cannot be fully determined by the date on which the applicable portion of the Payment becomes subject to the Excise Tax (“Payment Date”), the Company shall pay to the Employee by the Payment Date an estimate of such Gross-Up Payment, as determined by the Accounting Firm, and the Company shall pay to the Employee the remainder of such Gross-Up Payment (if any) as soon as the amount can be determined, but in no event later than 20 days after the Payment Date.

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4. Required Postponement for Specified Executives.

(a) Notwithstanding anything in this Agreement to the contrary, if Executive is considered a Specified Executive (as defined in Section 5) and payment of any amounts under this Agreement is required to be delayed for a period of six months after separation from service pursuant to Section 409A of the Code, payment of such amounts shall be delayed as required by section 409A, and the accumulated amounts, with accrued interest as described below, shall be paid in a lump sum payment within five days after the end of the six month period. If Executive dies during the postponement period prior to the payment of benefits, the amounts withheld on account of section 409A, with accrued interest as described below, shall be paid to the personal representative of Executive’s estate within 60 days after the date of Executive’s death.

(b) If payment of any amounts under this Agreement is required to be delayed pursuant to section 409A of the Code, the Company shall pay interest on the postponed payments from the date on which the amounts otherwise would have been paid to the date on which such amounts are paid at an annual rate equal to the prime rate listed in the Wall Street Journal as of Executive’s Termination Date.

5. Definitions. For purposes of this Agreement, the following terms shall have the meanings specified in this Section 5:

(a) “Affiliate” shall mean any subsidiary of the Company and any other entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with the Company, as determined by the Board.

(b) “Cause” shall mean any of the following grounds for termination of Executive’s employment:

(i) Executive shall have been convicted of a felony;

(ii) Executive neglects, refuses or fails to perform his or her material duties to the Company (other than a failure resulting from Executive’s incapacity due to physical or mental illness), which failure has continued for a period of at least 30 days after a written notice of demand for substantial performance, signed by a duly authorized officer of the Company, has been delivered to Executive specifying the manner in which Executive has failed substantially to perform;

(iii) Executive engages in misconduct in the performance of Executive’s duties;

(iv) Executive engages in public conduct that is harmful to the reputation of the Company;

(v) Executive breaches any written non-competition, non-disclosure or non-solicitation agreement in effect with the Company, including without limitation the provisions of Section 7 or 8 of this Agreement; or

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(vi) Executive breaches the Company’s written code of business conduct and ethics.

(c) “Change of Control” shall mean the happening of any of the following events with respect to the Company, as described in subsections (i) and (ii) below:

(i) The following events shall constitute a Change of Control:

(A) A sale or other disposition of all or substantially all of the assets of the Company;

(B) A liquidation or dissolution of the Company;

(C) A change in the composition of 50% or more of the members of the Board as a result of a merger, financial arrangement (such as the sale of surplus notes of the Company) or other corporate transaction, such that the directors who were members of the Board immediately before the transaction cease, within two years after the transaction, to constitute 50% or more of the board of directors of the Company or the successor corporation;

(D) Entry into an affiliation agreement giving any individual, entity or group, other than policyholders, the power to direct or cause the direction of the management and policies of the Company;

(E) Entry into an agreement reinsuring all or substantially all the business of the Company (other than through an Affiliate of the Company); or

(F) Consummation of a sale or other disposition of a controlling interest in the Company, other than to a direct or indirect wholly owned subsidiary of the Company.

(ii) In addition to the foregoing, the Board may determine, in its sole discretion, that any of the events described below shall constitute a Change of Control for purposes of this Agreement. None of the events described in this Section 5(c)(ii) shall be considered a Change of Control for purposes of this Agreement unless the Board determines, in a written resolution, that the event shall be considered a Change of Control for purposes of this Agreement, and nothing in this Agreement shall obligate the Board to make any such determination. The following events may constitute a Change of Control if so designated by the Board:

(A) A demutualization of the Company;

(B) Establishment of a mutual holding company structure for the Company; or

(C) Any reorganization or other event that the Board considers appropriate to characterize as a Change of Control for purposes of this Agreement.

(d) “Code” shall mean the Internal Revenue Code of 1986, as amended.

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(e) “Compensation” shall mean (i) Executive’s annualized Base Salary in effect at Executive’s Termination Date (or immediately before a Change of Control, if greater), plus (ii) the target annual bonus in effect for Executive for the year in which the Termination Date occurs (or the year in which a Change of Control occurs, if greater), together with (iii) all salary reduction authorized amounts of such compensation under any of the Company’s benefit plans or programs for such calendar year. “Compensation” shall not include the value of any long-term incentive compensation, equity grants, restricted stock or stock options or any exercise thereunder.

(f) “Employer” shall mean the Company, its Affiliates and their successors.

(g) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(h) “Good Reason” shall mean the occurrence of any of the following events, without Executive’s consent, except in connection with the termination of Executive’s employment for Disability, Cause, as a result of death or by Executive other than for Good Reason and except as provided in the last sentence of this subsection (h):

(i) A change in Executive’s position and responsibilities (including reporting responsibilities) that represents a substantial diminution, as reasonably determined by the Board, of Executive’s position and responsibilities as in effect immediately prior thereto;

(ii) The relocation of the offices of the Company at which Executive is principally employed to a location more than 50 miles from the location of such offices immediately prior to the relocation, or the Company’s requiring Executive to be based anywhere other than such offices, except for required travel on the Company’s business to an extent substantially consistent with the Executive’s business travel obligations at the date of this Agreement;

(iii) The failure of the Company to provide Executive with aggregate compensation (Base Salary and target long-term and short-term incentive compensation) or aggregate benefits that are at least equal (in terms of benefit levels and reward opportunities) to those provided by the Company to Executive immediately before the change; provided, however, that a change in compensation or benefits for all senior executives of the Company, in which Executive is treated similarly as all other executives of a comparable responsibility level, shall not constitute Good Reason under this Agreement; or

(iv) The failure of the Company to obtain from its successors the express assumption and agreement required under Section 17 hereof.

Notwithstanding the foregoing, Executive shall not have Good Reason for termination if, within 60 days after the date on which Executive gives notice of his or her termination, as provided in Section 6, the Company corrects the action or failure to act that constitutes the grounds for termination for Good Reason as set forth in Executive’s notice of termination.

(i) “Severance Period” shall mean (x) in the event of a termination of employment before a Change of Control, the period beginning on Executive’s Termination Date

15

and ending two years after the Termination Date and (y) in the event of a termination of employment at or after a Change of Control, the period beginning on Executive’s Termination Date and ending three years after the Termination Date.

(j) “Specified Executive” shall mean an employee who, at any time during the 12-month period ending on the identification date (defined below), is (i) an officer of the Company or a member of its controlled group (as determined for purposes of section 416(i) of the Code) who has annual compensation greater than $135,000 (or such other amount as may be in effect under Section 416(i)(1) of the Code), (ii) a 5% owner of the Company or (iii) a 1% owner of the Company who has annual compensation greater than $150,000. The identification date shall be each December 31, and the determination of Specified Executives as of such identification date shall apply for the 12-month period following April 1 after the identification date. The determination of Specified Executives, including the number and identity of persons considered officers, shall be made by the Company in accordance with the provisions of Sections 416(i) and 409A of the Code and the regulations issued thereunder.

(k) “Termination Date” shall mean the effective date of the termination of Executive’s employment relationship with the Company pursuant to this Agreement.

6. Notice of Termination. Any termination of Executive’s employment shall be communicated by a written notice of termination to the other party hereto given in accordance with Section 17. The notice of termination shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) briefly summarize the facts and circumstances deemed to provide a basis for a termination of employment and the applicable provision hereof, and (iii) specify the Termination Date in accordance with the requirements of this Agreement.

7. Confidential Information. Executive recognizes and acknowledges that, by reason of Executive’s employment by and service to the Employer (as defined in Section 5) during and, if applicable, after the Employment Term, Executive will continue to have access to certain confidential and proprietary information relating to the business of the Employer, which may include, but is not limited to, trade secrets, trade “know-how”, customer information, supplier information, cost and pricing information, marketing and sales techniques, strategies and programs, computer programs and software and financial information (collectively referred to as “Confidential Information”). Executive acknowledges that such Confidential Information is a valuable and unique asset of the Employer and Executive covenants that Executive will not, unless expressly authorized in writing by the Board, at any time during the course of Executive’s employment, use any Confidential Information or divulge or disclose any Confidential Information to any person, firm or corporation except in connection with the performance of Executive’s duties for the Employer and in a manner consistent with the Employer’s policies regarding Confidential Information. Executive also covenants that at any time after the termination of such employment, directly or indirectly, Executive will not use any Confidential Information or divulge or disclose any Confidential Information to any person, firm or corporation, unless such information is in the public domain through no fault of Executive or except when required to do so by law or legal process, in which case Executive will inform the Employer in writing promptly of such required disclosure, but in any event at least two business days prior to disclosure. All written Confidential Information (including, without limitation, in any computer or other electronic format) which comes into Executive’s possession during the

16

course of Executive’s employment shall remain the property of the Employer. Except as required in the performance of Executive’s duties for the Employer, or unless expressly authorized in writing by the Board, Executive shall not remove any written Confidential Information from the Employer’s premises, except in connection with the performance of Executive’s duties for the Employer and in a manner consistent with the Employer’s policies regarding Confidential Information. Upon termination of Executive’s employment, Executive agrees immediately to return to the Employer all written Confidential Information in Executive’s possession.

8. Non-Competition; Non-Solicitation.

(a) During Executive’s employment by the Employer and for a period of one year after Executive’s termination of employment for any reason, Executive will not, except with the prior written consent of the Board, directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit Executive’s name to be used in connection with, any business or enterprise which is engaged in any financial services, insurance or other business that is competitive with any business or enterprise in which the Employer is engaged, anywhere in the world, during Executive’s employment or (with respect to the application of this covenant after Executive’s termination of employment) during the two year period preceding Executive’s termination of employment. The parties acknowledge that the Employer engages in its business on a worldwide basis, and Executive acknowledges that his or her responsibilities extend to the Employer’s worldwide operations.

(b) The foregoing restrictions shall not be construed to prohibit the ownership by Executive of less than five percent of any class of securities of any corporation which is engaged in any of the foregoing businesses having a class of securities registered pursuant to the Exchange Act, provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes any part in its business, other than exercising Executive’s rights as a shareholder, or seeks to do any of the foregoing.

(c) Executive further covenants and agrees that during Executive’s employment by the Employer and for a period of one year thereafter, Executive will not, except with the prior written consent of the Board, directly or indirectly, solicit or hire, or encourage the solicitation or hiring of, any person who was a managerial or higher level employee of the Employer at any time during the term of Executive’s employment by the Employer by any employer other than the Employer for any position as an employee, independent contractor, consultant or otherwise. The foregoing covenant of Executive shall not apply to any person after 12 months have elapsed after the date on which such person’s employment by the Employer has terminated.

(d) The covenants described in this Section 8 shall continue to apply during the period specified herein after Executive’s termination of employment for any reason, without regard to whether Executive executes a Release or receives any severance benefits as a result of

17

such termination. If Executive breaches any of the covenants described in this Section 8, the applicable period during which the covenant applies shall be tolled during the period of the breach. Without limiting the foregoing, the severance benefits provided under this Agreement are specifically designated as additional consideration for the covenants described in Section 7 and this Section 8.

9. Equitable Relief.

(a) Executive acknowledges and agrees that the restrictions contained in Sections 7 and 8 are reasonable and necessary to protect and preserve the legitimate interests, properties, goodwill and business of the Employer, that the Employer would not have entered into this Agreement in the absence of such restrictions and that irreparable injury will be suffered by the Employer should Executive breach any of the provisions of those Sections. Executive represents and acknowledges that (i) Executive has been advised by the Employer to consult Executive’s own legal counsel in respect of this Agreement, and (ii) Executive has had full opportunity, prior to execution of this Agreement, to review thoroughly this Agreement with Executive’s counsel.

(b) Executive further acknowledges and agrees that a breach of any of the restrictions in Sections 7 and 8 cannot be adequately compensated by monetary damages. Executive agrees that the Employer shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as an equitable accounting of all earnings, profits and other benefits arising from any violation of Sections 7 or 8 hereof, which rights shall be cumulative and in addition to any other rights or remedies to which the Employer may be entitled. In the event that any of the provisions of Sections 7 or 8 hereof should ever be adjudicated to exceed the time, geographic, service, or other limitations permitted by applicable law in any jurisdiction, it is the intention of the parties that the provision shall be amended to the extent of the maximum time, geographic, service, or other limitations permitted by applicable law, that such amendment shall apply only within the jurisdiction of the court that made such adjudication and that the provision otherwise be enforced to the maximum extent permitted by law.

(c) Notwithstanding anything in this Agreement to the contrary, if Executive breaches any of Executive’s obligations under Sections 7 or 8 hereof, the Company shall thereafter be obligated only for the compensation and other benefits provided in any Company benefit plans, policies or practices then applicable to Executive in accordance with the terms thereof, and all payments under Sections 2 and 3 of this Agreement shall cease.

(d) Executive irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of Section 7 or 8 hereof, including without limitation, any action commenced by the Employer for preliminary and permanent injunctive relief and other equitable relief, may be brought in a United States District Court for Ohio, or if such court does not have jurisdiction or will not accept jurisdiction, in any court of general jurisdiction in Columbus, Ohio, (ii) consents to the non-exclusive jurisdiction of any such court in any such suit, action or proceeding, and (iii) waives any objection which Executive may have to the laying of venue of any such suit, action or proceeding in any such court. Executive also irrevocably and

18

unconditionally consents to the service of any process, pleadings, notices or other papers in a manner permitted by the notice provisions of Section 17 hereof.

(e) Executive agrees that for a period of three years following the termination of Executive’s employment for any reason, Executive will provide, and at all times after the date hereof the Employer may similarly provide, a copy of Sections 7 and 8 hereof to any business or enterprise (i) which Executive may directly or indirectly own, manage, operate, finance, join, control or in which Executive may participate in the ownership, management, operation, financing, or control, or (ii) with which Executive may be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise, or in connection with which Executive may use or permit to be used Executive’s name; provided, however, that this provision shall not apply in respect of Section 8 after expiration of the time periods set forth therein.

10. Payment of Supplemental Benefits. The supplemental benefits under Section 2.3(b)(vi), Section 2.3(b)(vii), Section 3.4(b)(vi) and Section 3.4(b)(vii) (the “Enhanced Benefits”) shall be paid as follows:

(a) The Enhanced Benefits that are calculated with respect to the Nationwide Retirement Plan and Nationwide Supplemental Retirement Plan shall be paid in the same form and the same time as Executive’s benefits under the Nationwide Supplemental Retirement Plan are paid (or under the default provisions of the Nationwide Supplemental Retirement Plan if Executive is not otherwise entitled to receive a benefit under that Plan).

(b) The Enhanced Benefits that are calculated with respect to the Nationwide Excess Benefit Plan shall be paid in the same form and at the same time as Executive’s benefits under the Nationwide Excess Benefit Plan are paid (or under the default provisions of the Nationwide Excess Benefit Plan if Executive is not otherwise entitled to receive a benefit under that Plan).

(c) The Enhanced Benefits that are calculated with respect to the Nationwide Savings Plan and Nationwide Supplemental Defined Contribution Plan shall be paid in the same form and at the same time as Executive’s benefits under the Nationwide Supplemental Defined Contribution Plan are paid.

(d) The Enhanced Benefits that are calculated with respect to the Nationwide Individual Deferred Compensation Retirement Plan shall be paid in the same form and the same time as Executive’s benefits under the Nationwide Individual Deferred Compensation Plan are paid.

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11. Indemnification. The Company shall indemnify Executive with respect to Executive’s actions in the performance of Executive’s duties as set forth in Section 1.2 to the fullest extent permitted by the Company’s Amended and Restated Code of Bylaws as in effect from time to time.

12. Non-Exclusivity of Rights; Resignation from Boards.

(a) Nothing in this Agreement shall prevent or limit Executive’s continuing or future participation in or rights under any benefit, bonus, incentive or other plan or program provided by the Company and for which Executive may qualify; provided, however, that if Executive becomes entitled to and receives the payments described in Section 2.3(b) or 3.4(b) of this Agreement, Executive hereby waives Executive’s right to receive payments under any severance plan or similar program applicable to all employees of the Company.

(b) If Executive’s employment with the Company terminates for any reason, Executive shall immediately resign from all boards of directors of the Company, any Affiliates and any other entities for which Executive serves as a representative of the Company.

13. Survivorship. The respective rights and obligations of the parties under this Agreement (including without limitation Sections 7, 8 and 9) shall survive any termination of Executive’s employment to the extent necessary to the intended preservation of such rights and obligations.

14. Mitigation. Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment that Executive may obtain.

15. Benefit Plans; Outstanding Awards. All references in this Agreement to specific retirement or other benefit plans of the Company shall be deemed to include any successor retirement or other benefit plans. The terms of Executive’s outstanding stock options, restricted stock and long-term incentive awards are hereby amended to provide that, without adversely affecting any rights that Executive has under such award agreements, the award agreements are amended to provide for the accelerated vesting and payments upon termination of employment as provided in Sections 2.3(b) and 3.4(b) of this Agreement, to the extent consistent with the applicable plans. In all respects not amended, the provisions of such outstanding awards shall remain in effect according to their terms.

16. Arbitration; Expenses. In the event of any dispute under the provisions of this Agreement, other than a dispute in which the primary relief sought is an equitable remedy such as an injunction, the parties shall be required to have the dispute, controversy or claim settled by arbitration in Columbus, Ohio in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association, before a panel of three arbitrators, one of whom shall be selected by the Company, one of whom shall be selected by Executive, and the third of whom shall be selected by the arbitrators selected by the Company and Executive. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by either party in accordance with applicable law in any

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court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of the Agreement. In the event of a dispute, each party shall be responsible for its own expenses (including attorneys’ fees) relating to the conduct of the arbitration, and the parties shall share equally the fees of the American Arbitration Association. Each party shall give the other party written notice as described in Section 17 of its intent to submit a claim under this Agreement to arbitration and a description of the basis of such claim, within six months after the event giving rise to the claim occurs.

17. Notices. All notices and other communications required or permitted under this Agreement or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered or mailed by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received):

If to the Company, to:

Nationwide Mutual Insurance Company

One Nationwide Plaza, 1-35-03

Columbus, OH 43215

Attention:  Executive Vice President and Chief Administrative Officer

                  Executive Vice President, General Counsel

With a required copy to:

Morgan, Lewis & Bockius LLP

1701 Market Street

Philadelphia, PA 19103-2921

Attention: Mims Maynard Zabriskie

If to Executive, to:

James Lyski

__________________

__________________

or to such other names or addresses as the Company or Executive, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section.

18. Contents of Agreement; Amendment and Assignment.

(a) This Agreement sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and cannot be changed, modified, extended or terminated except upon written amendment approved by the Board and executed on its behalf by a duly authorized officer of the Company and by Executive.

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(b) All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Executive under this Agreement are of a personal nature and shall not be assignable or delegatable in whole or in part by Executive. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, within 15 days of such succession, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place.

19. Severability. If any provision of this Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provision or application of this Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision or application in any other jurisdiction. If any provision is held void, invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances.

20. Remedies Cumulative; No Waiver. No remedy conferred upon a party by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given under this Agreement or now or hereafter existing at law or in equity. No delay or omission by a party in exercising any right, remedy or power under this Agreement or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by such party from time to time and as often as may be deemed expedient or necessary by such party in its sole discretion.

21. Beneficiaries/References. Executive shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable under this Agreement following Executive’s death by giving the Company written notice thereof. In the event of Executive’s death or a judicial determination of Executive’s incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to Executive’s beneficiary, estate or other legal representative.

22. Miscellaneous. All section headings used in this Agreement are for convenience only. This Agreement may be executed in counterparts, each of which is an original. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts.

23. Withholding Taxes. All payments under this Agreement shall be made subject to applicable tax withholding, and the Company shall withhold from any payments under this Agreement all federal, state and local taxes as the Company is required to withhold pursuant to any law or governmental rule or regulation. Except as specifically provided otherwise in this Agreement, Executive shall be responsible for all taxes applicable to amounts payable under this Agreement and payments under this Agreement shall not be grossed up for taxes.

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24. Section 409A of the Code. This Agreement is intended to comply with Section 409A of the Code and its corresponding regulations, to the extent applicable. Notwithstanding anything in this Agreement to the contrary, payments may only be made under this Agreement upon an event and in a manner permitted by Section 409A of the Code, to the extent applicable.

25. Governing Law. This Agreement shall be governed by and interpreted under the laws of the State of Ohio without giving effect to any conflict of laws provisions.

IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first above written.

NATIONWIDE MUTUAL INSURANCE COMPANY

By:

Name:

Title:

Executive

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EX-12

Exhibit 12

Nationwide Financial Services, Inc. and Subsidiaries

Statement Regarding Computation of Earnings to Fixed Charges

(in millions)

	Years ended December 31
	2006		2005		2004		2003		2002
Earnings:
Income from continuing operations before federal income tax expense	$	778.9	$	756.1	$	675.1	$	519.5	$	140.7
Fixed charges		1,484.0		1,510.6		1,430.7		1,463.4		1,337.4
	$	2,262.9	$	2,266.7	$	2,105.8	$	1,982.9	$	1,478.1
Fixed Charges:
Interest credited to policyholder account balances	$	1,380.3	$	1,380.9	$	1,328.3	$	1,367.6	$	1,260.7
Interest on debt		103.7		108.0		102.4		95.8		76.7
Debt extinguishment costs		—		21.7		—		—		—
	$	1,484.0	$	1,510.6	$	1,430.7	$	1,463.4	$	1,337.4
Ratio of earnings to fixed charges		1.5		1.5		1.5		1.4		1.1
Ratio of earnings to fixed charges, excluding interest credited to policyholder account balances		8.5		6.8		7.6		6.4		2.8

EX-21

Exhibit 21

NATIONWIDE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Subsidiaries of the Registrant

As of December 31, 2006

The following list includes subsidiaries of Nationwide Financial Services, Inc. Subsidiaries of subsidiaries are indicated by indentations. All subsidiaries are wholly-owned unless otherwise indicated.

Subsidiary	State of Incorporation or Organization
Nationwide Life Insurance Company	Ohio
Nationwide Life and Annuity Insurance Company	Ohio
Nationwide Investment Services Corporation	Oklahoma
Nationwide Financial Assignment Company	Ohio
Nationwide Investment Advisors LLC	Ohio
Nationwide Community Development Corporation, LLC (67% owned)	Ohio
Nationwide Properties, Ltd. (97.6% owned)	Ohio
Nationwide Affordable Housing, LLC (45% owned)	Ohio
Life REO Holdings LLC	Ohio
Gardiner Point Hospitality LLC	Ohio
Nationwide Life Insurance Company of America	Pennsylvania
Nationwide Life and Annuity Company of America	Delaware
Nationwide Life Insurance Company of Delaware	Delaware
Nationwide Provident Holding Company	Pennsylvania
1717 Capital Management Company	Pennsylvania
Washington Square Administrative Services, Inc.	Pennsylvania
Provestco, Inc.	Delaware
RCMD Financial Services, Inc.	Delaware
1717 Advisory Services, Inc.	Pennsylvania
1717 Brokerage Services, Inc.	Pennsylvania
1717 Insurance Agency of Massachusetts, Inc.	Massachusetts
Nationwide Financial Services Capital Trust	Delaware
Nationwide Bank	Federal Incorporation
Nationwide Financial Structured Products, LLC	Ohio
TBG Insurance Services Corporation d/b/a TBG Financial (69% owned)	Delaware
TBG Advisory Services Corporation	California
TBG Aviation, LLC	California
TBG Danco Insurance Services Corporation	California
TBG Financial & Insurance Services Corporation	California
TBG Financial and Insurance Services Corporation of Hawaii	Hawaii
Mullin TBG Insurance Agency Services, LLC (50% owned)	Delaware
NF Reinsurance Ltd.	Bermuda

Subsidiary	State of Incorporation or Organization
NFS Distributors, Inc.	Delaware
Nationwide Retirement Solutions, Inc.	Delaware
Nationwide Retirement Solutions, Inc. of Arizona	Arizona
Nationwide Retirement Solutions Insurance Agency, Inc.	Massachusetts
Nationwide Retirement Solutions, Inc. of Ohio	Ohio
Nationwide Retirement Solutions, Inc. of Texas	Texas
Nationwide Financial Institution Distributors Agency, Inc.	Delaware
Nationwide Financial Institution Distributors Insurance Agency, Inc. of Massachusetts	Massachusetts
Nationwide Financial Institution Distributors Insurance Agency, Inc. of New Mexico	New Mexico
The 401(k) Companies, Inc.	Texas
401(k) Investment Services, Inc.	Texas
401(k) Investment Advisors, Inc.	Texas
The 401(k) Company	Texas
Pension Associates, Inc.	Wisconsin
Registered Investment Advisors Services, Inc. d/b/a RIA Services, Inc.	Texas

All business operations of Nationwide Financial Services, Inc. and all of its subsidiaries are conducted using each company’s legally registered name, except for TBG Insurance Services Corporation d/b/a TBG Financial and Registered Investment Advisors, Inc. d/b/a RIA Services, Inc.

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Nationwide Financial Services, Inc.:

We consent to the incorporation by reference in the registration statement (No. 333-102007) on Form S-3, (No. 333-52775) on Form S-8 and (No. 333-110628) on Form S-8 of Nationwide Financial Services, Inc. of our reports dated March 1, 2007, with respect to the consolidated balance sheets of Nationwide Financial Services, Inc. and subsidiaries (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2006, and all related financial statement schedules (hereafter, financial statements), management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, and the effectiveness of internal control over financial reporting as of December 31, 2006, which reports appear in the December 31, 2006, annual report on Form 10-K of Nationwide Financial Services, Inc. Our report with respect to the financial statements refers to the Company’s adoption of the American Institute of Certified Public Accountants’ Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts, in 2004.

/s/ KPMG LLP

Columbus, Ohio

March 1, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION

I, W.G. Jurgensen, certify that:

1. I have reviewed this report on Form 10-K of Nationwide Financial Services, Inc.;

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2007

	/s/    W.G. JURGENSEN
Name:	W.G. Jurgensen
Title:	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Timothy G. Frommeyer, certify that:

1. I have reviewed this report on Form 10-K of Nationwide Financial Services, Inc.;

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 1, 2007

	/s/    TIMOTHY G. FROMMEYER
Name:	Timothy G. Frommeyer
Title:	Senior Vice President—Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Nationwide Financial Services, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, W.G. Jurgensen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

March 1, 2007

/s/ W.G. Jurgensen
Name:	W.G. Jurgensen
Title:	Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Nationwide Financial Services, Inc. and will be retained by Nationwide Financial Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Nationwide Financial Services, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy G. Frommeyer, Senior Vice President—Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

March 1, 2007

/s/ Timothy G. Frommeyer
Name:	Timothy G. Frommeyer
Title:	Senior Vice President— Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Nationwide Financial Services, Inc. and will be retained by Nationwide Financial Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.