10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 2004

Commission File Number 0-4690

Financial Industries Corporation

(Exact name of registrant as specified in its charter)

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

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

(Address including Zip Code of Principal Executive Offices)

(512) 404-5000

(Registrant’s Telephone Number)

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

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

Common Stock, $.20 par value

(Title of Class)

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter)is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES o NO x

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

Large accelerated filer o Accelerated filer x Non-accelerated filer o

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant on June 30, 2004, based on the closing sales price on the Nasdaq ($9.28), was $87,286,242.

The number of shares outstanding of Registrant’s common stock on September 30, 2006, was 9,869,504.

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Forward-Looking Statements

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

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SPECIAL NOTE ABOUT THIS REPORT

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

PART I

ITEM 1. DESCRIPTION OF THE BUSINESS

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

General Development of the Business

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

Through 1984, FIC’s principal business was the sale and underwriting of life and health insurance, mainly in the midwestern and southwestern United States. From 1985 to 1987, FIC acquired a 48.1% equity interest in InterContinental Life Corporation (“ILCO”). At that time, ILCO was a publicly traded New Jersey corporation engaged in the sale and underwriting of life insurance and annuities through various subsidiaries. In 1991, FIC purchased Family Life, a Washington-based life insurance company, from Merrill Lynch Insurance Group, Inc. In 2001, FIC acquired the remaining shares of ILCO through a merger of a subsidiary of FIC with and into ILCO. See “Acquisitions, Acquisition Financing, and Divestitures-Acquisition of Investors Life.”

Until September 2002, the business and affairs of the Company were led by its former Chairman, CEO, and President, Roy Mitte. After Mr. Mitte’s termination as an executive officer, the Company in 2003 entered into several initiatives (see “Purchase and Sale of ‘New Era’ Companies” and “Investment of Assets” below). In 2003, a proxy contest relating to the election of directors resulted in the election in August 2003 of a majority of the board of directors from among the dissident candidates. Since August 2003, this newly constituted Board (the “new Board”) has taken substantial steps (described elsewhere in this document) intended to stabilize the business and refocus FIC’s growth strategy.

Changes in Management

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

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

Exploration of Strategic Alternatives

In the Company’s Form 8-K filed on June 9, 2006, the Board announced that it has retained Keefe, Bruyette & Woods, Inc. as its financial advisor to explore strategic alternatives of the Company to enhance shareholder value, including, but not limited to, the potential sale of the Company or its insurance subsidiaries. There can be no assurance that a transaction will result and the Company does not currently intend to disclose developments regarding its exploration unless and until the Board has approved a specific transaction.

Change in Domiciliary State

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

Creation of New Insurance Service Company

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

Acquisitions and Divestitures

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

Acquisition of Family Life. In 1991, FIC acquired Family Life, a Washington-based life insurance company, from Merrill Lynch Insurance Group, Inc. Family Life’s primary business is the underwriting and sale of mortgage protection life insurance to customers who are mortgage borrowers from financial institutions with which Family Life has marketing relationships. Family Life distributes its insurance products primarily through a national career agency sales force. See “Insurance Subsidiaries - Family Life”.

Acquisition of Investors Life.From 1985 to 1987, FIC acquired an equity interest (approximately 48%) in InterContinental Life Corporation (“ILCO”), a public company that owned several life insurance companies. In December 1988, ILCO acquired Investors Life. During the 1990s, ILCO acquired several other insurance companies and merged its insurance subsidiaries into Investors Life. In May 2001, FIC acquired the remaining 51.9% of ILCO, making Investors Life an indirect, wholly-owned subsidiary of FIC. See “Insurance Subsidiaries – Investors Life.”

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

The performance of the New Era companies after the acquisition was substantially below plan. By the fourth quarter of 2003, the Company had advanced approximately $1 million in working capital to the New Era companies. JNT, the third-party administration company, required extensive reworking of its recordkeeping systems during this period as well, along with a

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$200,000 infusion from FIC into the fiduciary accounts maintained by JNT for its customers. One of the New Era principals resigned during this period, alleging “good reason” under the provisions of his employment agreement; see Item 3-Legal Proceedings-Litigation with Former Employee. On December 3, 2003, the remaining five New Era principals/employees notified the Company that they were resigning their employment, effective as of December 16, 2003, alleging that such resignations were for “good reason” under the provisions of their employment agreements. The Company notified the individuals that it disputed the “good reason” claim, and that their resignations would be viewed as a breach of their employment agreements.

After reviewing the long-term prospects for the New Era companies, the Company decided in December 2003 to sell them. In light of the significant operating loss that had been generated by these companies since the June 2003 acquisition, their significant use of working capital during the same period, and the perceived poor future prospects for the businesses, the New Era companies were resold to five of the New Era principals for one dollar. The sale closed on December 31, 2003.

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

Acquisition-Related Financing

Financing for Family Life Acquisition. The acquisition of Family Life in 1991 was financed in part through loans obtained from various third-party financing sources. By 1996, these loans had been replaced entirely by subordinated loans from Investors Life to FIC and Family Life Corporation. The outstanding balance on these loans at December 31, 2004, and June 30, 2006, was $15.4 million. With the approval of the Texas Department of Insurance, these loans were restructured as of March 18, 2004. As amended, the loans provide for a reduction in the interest rate from 9% to 5% for the balance of the term of the loans, no required principal payments for the period from June 12, 2004, to December 12, 2005, a resumption of principal payments on March 12, 2006, and ten equal quarterly principal payments until the maturity date of June 12, 2008. Again with the approval of the Texas Department of Insurance, the loans were restructured as of March 9, 2006. As amended, the loans provide for a moratorium on principal payments for the period from March 12, 2006 to December 12, 2006, with principal payments to resume on March 12, 2007, with ten equal quarterly principal payments until the maturity date of June 12, 2009.

Because Investors Life is a wholly owned subsidiary of FIC, these loans do not appear on FIC’s consolidated balance sheets. The debt service associated with the loans, however, does affect FIC’s cash flow requirements, as well as the ability of FIC’s insurance subsidiaries to generate dividends or other cash flow to FIC. This debt service obligation also affects FIC’s ability to pay dividends to its shareholders.

FIC Borrowing in 2003. In May 2003, FIC borrowed $15.0 million by issuing subordinated notes. It used the proceeds in part for the acquisition of the New Era companies (see “Purchase and Sale of ‘New Era’ Companies,” below) and in part for general corporate purposes. The notes bear interest at LIBOR plus 4.2%, require the payment only of interest through May 22, 2033, and require repayment of the entire $15.0 million of principal on May 22, 2033. For a more extensive description of the notes, see Note 7 to the consolidated financial statements.

Financial Information About Segments

The principal operations of the Company’s insurance subsidiaries are the underwriting of life insurance and annuity products. Accordingly, no separate segment information is required to be provided by the Company for the three-year period ended December 31, 2004.

Description of the Business

Insurance Subsidiaries

The Company markets and sells life insurance products through agents of its insurance subsidiaries, Family Life and Investors Life. Effective April 1, 2004, the distribution of fixed annuity products was temporarily discontinued. During 2004 and 2003, the Company received $5.8 million and $23.1 million, respectively, of deposits under annuity contracts. The Company may resume the marketing of fixed annuity products in the future, depending upon market conditions and the development of new products that are more competitive; however, no definite date has been set for resumption of such sales.

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Family Life. Family Life, which was organized in the State of Washington in 1949 and redomesticated to the State of Texas in 2004, specializes in providing mortgage protection life insurance tomortgage loan borrowers. Family Life believes that it is the only nation-wide captive-agent life insurance company operating primarily through leads from financial institutions. As of June 30, 2006, Family Life has contractual relationships with approximately 80 mortgage-service organizations across the country. This includes both mortgage-service companies actively marketing Family Life’s programs on an on-going basis and mortgage-service companies that do not market with Family Life but do allow insureds the convenience of including their premium payment with the monthly mortgage payment. Family Life has strong contractual relationships with many of the A-paper mortgage servicers and the top subprime lenders in the U.S. In recent years, certain mortgage-service companies have developed their own distribution systems for insurance products that are in competition with Family Life products, which has resulted in a decrease in revenues from some of the organizations with whom Family Life retains relationships. Family Life is currently evaluating alternatives to deal with this development.

Family Life’s mortgage protection business consists of term and universal life insurance sold to homeowners. Generally, the Family Life insurance policies are designed to repay or reduce the mortgage balances of policyholders in the event of their death. These policies are sold primarily to customers of independent financial institutions, often facilitated by a current list of borrowers provided by the financial institution. These policies may list the lending financial institution as the primary beneficiary of the life insurance policy. A key feature of the Family Life system is the ability to bill and collect premiums through the policyholder’s monthly mortgage payments. This system enables Family Life to provide a convenient solution to the financial security needs of the under-served and under-protected low-to-moderate income homeowner market, which is currently its primary market.

Direct access to mortgage customers and the convenience of the insured making payments through their mortgage bill provide Family Life with a competitive advantage in this market. Family Life’s primary distribution channel is its exclusiveforce of approximately 196active agents as of June 30, 2006. During 2003 and 2004, the sales organization was extensively restructured to lower overall policy acquisition costs. The Company also upgraded its product portfolio in 2004 to offer more competitive features and benefits, including an option to return premiums paid if the insured lives to the end of the term period.

Family Life is licensed to sell annuity andlife insurance products in 49 states and the District of Columbia (and not licensed to sell in New York) as of June 30, 2006. In 2004, Family Life derived premium income from all states in which it was licensed, with Texas, California and Florida accounting for approximately 29%, 21% and 5% of statutory premiums, respectively.

In 2004, direct statutory premiums received on Family Life’s life insurance products totaled $28.8 million. This compares to $32.8 million in 2003 and $36.9 million in 2002. First-year premium received was $3.6 million in 2004, compared to $4.1 million in 2003 and $4.0 million in 2002. See also “Agency Operations - Family Life Distribution System.”

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

Investors Life. During 2004, Investors Life was engaged primarily in administering its existing portfolio of individual life insurance and annuity policies. Investors Life is licensed to sell individual life insurance and annuity products in 49 states (not licensed in New York), the District of Columbia, and the U.S. Virgin Islands as of June 30, 2006. These products were marketed through independent, non-exclusive general agents. In 2004, Investors Life derived premium income from all states in which it was licensed, with the largest amounts, 13%, 8%, and 8%, derived from Pennsylvania, California and Ohio, respectively.

Products currently underwritten by Investors Life include a universal life insurance plan that ranks favorably to similar products offered by its competitors with regard to guaranteed and current assumption cash values. Universal life insurance provides death benefit protection with flexible premium and coverage features, and the crediting of interest on cash values, at company-declared current interest rates. Under the flexible premium policies, policyholders may vary the amounts of their coverage (subject to minimum and maximum limits) as well as the dates of payments and frequency of payments.

In addition, Investors Life has introduced a series of level-term life products aimed at the mortgage-protection market that feature competitive rates and a guaranteed return of premium option. The Company has also offered, but has temporarily discontinued the sale of, fixed annuity products. In 2005, Investors Life introduced a new whole life product (the “Final Expense Product”) designed to compete in the 50 to 85 year-old population market. This product is a simplified issue product which had allowed Investors Life to improve its agent and customer support. The Final Expense Product has allowed Investors Life to enter into the new niche market of the 50 to 85 year-old population.

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Direct statutory premiums received from all types of life insurance policies sold by Investors Life were $35.4 million in 2004, as compared to $38.9 million in 2003 and $42.1 million in 2002. Investors Life received reinsurance premiums from Family Life of $4.4 million in 2004, pursuant to the reinsurance agreement for universal life products written by Family Life. First-year premiums received were $251,000 in 2004, as compared to $1.1 million in 2003 and $1.3 million in 2002. The reduction in premiums received during the period from 2002 to 2004 and the relatively small amounts of first-year premiums received are a significant concern of the Company’s management, which is studying steps that are designed to increase the distribution of products written by Investors Life. See also “Agency Operations - Investors Life Distribution System.”

Direct deposits from the sale of fixed annuity products were $6.5 million in 2004, compared to $21.7 million in 2003 and $16.4 million in 2002.

Investors Life also sponsors a variable annuity separate account, through which it has offered single premium and flexible premium policies. The policies provide for the contract owner to allocate premium payments among four different portfolios of Putnam Variable Trust (the “Putnam Fund”), a series fund which is managed by Putnam Investment Management, Inc. As of December 31, 2004, the assets held in the separate account totaled $27.9 million. During 2004, the premium received in connection with these variable annuity policies was $176,000, which was received from existing contract owners. Investors Life no longer actively markets these products.

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

Investors Life also maintains a closed variable annuity separate account, with approximately $10.9 million of assets as of December 31, 2004. The separate account was closed to new purchases in 1981 as a result of an IRS ruling that adversely affected the status of variable annuity separate accounts that invest in publicly-available mutual funds. The ruling did not adversely affect the status of in-force contracts.

Through its affiliate, ILG Sales Corporation, Investors Life operates a distribution system for the products of third-party life insurance companies. The marketing arrangement makes available, to appointed agents of Investors Life, types of life insurance and annuity products not currently being offered by Investors Life. The underwriting risk on the products sold under this arrangement is assumed by the third-party insurer. The Company’s appointed agents receive commissions on the sales of these products and the Company’s marketing subsidiary, ILG Sales Corporation, receives an override commission. During 2004, ILG Sales Corporation received override revenues of $569,000 through this distribution system. At December 31, 2004, Investors Life had relationships with approximately 200 agents engaged in this marketing effort as well as the sale of Investors Life’s own products. At June 30, 2006, reflecting the reorganization of the Investors Life distribution system described below, only 45 agents were licensed to sell both the products of Investors Life and those of unrelated companies available through ILG Sales Corporation.

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

Agency Operations

The products of FIC’s insurance subsidiaries are marketed and sold through two separate distribution channels.

Family Life Distribution System.Family Life utilizes a nationwide exclusive agent force to sell its products. This agent force sells mortgage protection life insurance and, prior to April 2004, annuity products. The products are sold primarily to

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customers of Family Life’s client financial institutions with mortgage loans under $150,000, usually through a list of borrowers provided by the financial institution. Family Life works closely with the financial institutions to maintain the Family Life lead systems, which have been built from the loan portfolios of each active financial institution. Family Life agents canvass in person the mortgage borrowers of the financial institutions that are active on the Family Life lead system to offer the borrowers the opportunity to purchase mortgage protection insurance (term or universal life insurance products).

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

A principal focus of Family Life’s marketing activity is the development and maintenance of contractual agreements with the financial institutions that provide referrals to, and collect monthly premiums from, their borrowers for Family Life insurance plans. Family Life has established a regional manager-district manager structure, with all compensation to managers and agents on a variable basis, based on sales production.

During the last few years, Family Life has experienced changing demographics in the types of polices that its historic market can afford. In addition, during years with low interest rates, policyholders are refinancing mortgages with other lenders, leading to the challenge of keeping the policies in-force that were once billed by the previous lender. Based upon these changes, Family Life is currently evaluating how these industry changes affect its distribution system.

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

Investors Life has recently reorganized its distribution system to enhance its ability to distribute its life insurance products. In connection with this reorganization, Investors Life has eliminated several layers of salaried sales managers and substituted a system of personal producing agents (“PPGAs”) managed directly from the home office. The Company believes that this PPGA system better suits the current sales level and enables Investors Life to provide an attractive level of commissions to agents. At June 30, 2006, the Company had 349 of these agents.

In 2005, Investors Life entered into a relationship with Ultra, Inc. (“Ultra”), an independent marketing organization (“IMO”) based in Kentucky, to distribute Investors Life’s new Final Expense Product. Ultra currently has approximately 404 agents selling the Final Expense Product. Investors Life is looking into marketing this product through its own independent agents as well as other IMOs.

In 2005, Investors Life also transitioned a significant portion of its Final Expense Product processing to a third party, Direct Insurance Marketing Administrators Corporation (“DIMA”). DIMA performs the file setup and all pre-underwriting functions. Investors Life makes the underwriting decision for each policy, and after DIMA receives the underwriting decision, prints and mails the accepted policies to the policyholders. Investors Life pays a fixed fee of $45 for each Final Expense policy issued. Because fees are only paid based on policies issued, this reduces the overhead cost of Investors Life with its Final Expense Product.

As an ongoing part of the reorganization of our distribution systems, Investors Life transitioned the exclusive agents of Family Life to the new “Exclusive Agent Division” of Investors Life. The creation of this new Division affords these agents an expanded, more competitive portfolio of products and improved sales methods designed to improve the overall marketability of the Company products to the mortgage protection market. Because of these structural marketing changes, Family Life’s new business premium will be significantly reduced. While the official target date for this transition is the third quarter of 2006, a total of 44 agents have been transitioned through June 30, 2006.

In May of 2006, the Company announced the reorganization of its sales and marketing departments for Family Life and Investors Life. The reorganization provides for a “shared services” marketing and sales department that combines into one unit several functions to serve all agent support needs for its life insurance subsidiaries, Investors Life and Family Life and allows each insurance subsidiary to leverage the expertise of the other. Management is currently evaluating various options to maximize the effectiveness and efficiencies of the combined departments, including the combined use of Investors Life and Family Life distribution systems and products.

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

Beginning in June 2003, FIC undertook the development of both annuity and insurance products for distribution by Equita. As of December 31, 2004, however, Equita had not begun the distribution of any FIC products. In February 2004, Equita informed FIC that Equita regarded FIC to be in breach of several of FIC’s obligations under the marketing agreement. In June 2005, Equita commenced litigation against FIC pertaining to matters arising out of the option agreement. See “Item 3-Legal Proceedings-Litigation with Equita Financial and Insurance Services of Texas, Inc. and M&W Insurance Services, Inc.”

Investment of Assets

From February through August 2003, FIC’s investment of its securities portfolio was directed by its internal investment committee. A number of bond purchases during this period resulted in part, at the end of September 2003, in writedowns of approximately $5.2 million of other than temporarily impaired investments. These bonds were all sold in the fourth quarter of 2003, resulting in a small additional loss subsequent to the writedowns. One additional bond purchased in early 2003 was sold in late 2003 for a net pre-tax gain of $580,000. On August 21, 2003, when the new Board took office, it suspended the investment authority of the internal investment committee and halted all trading. The Company retained Conning Asset Management Company (“Conning”) as the investment manager for the Company’s investment assets on October 20, 2003. Conning now manages the portfolio investment and investment accounting for the Company, reporting directly to the Investment Committee of the Board of Directors and to the Company’s CEO. The new Board’s Investment Committee has also adopted new Investment Policies for both Investors Life and Family Life.

In early October 2003, the new Board commenced (through outside counsel) an investigation into whether certain of the Company’s investment transactions for the period from January 2003 through August 21, 2003, had resulted in the payment of excessive mark ups and mark downs. The Company referred the results of its review to the National Association of Securities Dealers (“NASD”), which declined to initiate any formal action. After a review of its options, the Board concluded that it would not be in the best interests of the Company to pursue legal remedies.

At December 31, 2004, invested assets (including cash and cash equivalents) totaled $740.3 million. The general investment objective of the Company emphasizes the selection of short-to-medium term, high-quality, fixed-income securities, rated Baa-3 (investment grade) or better by Moody's Investors Service, Inc. In October 2005, the Board authorized Conning to invest up to $20 million for Investors Life and $5 million for Family Life in investments that are rated below investment grade. This change in policy provides flexibility to Investors Life and Family Life to enhance overall portfolio performance under various market conditions or event-driven opportunities.

The Company, with the assistance of Conning, began more actively managing its asset/liability matching in 2004. Of FIC’s invested assets, 67.4 % were in fixed maturity securities available for sale at December 31, 2004. At December 31, 2004, this portfolio consisted of 12% in government securities, 51% in corporate obligations, and 37% in mortgage-backed and asset-backed securities.

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

The assets held by Family Life and Investors Life must comply with applicable state insurance laws and regulations. In selecting investments for the portfolios of its life insurance subsidiaries, the Company emphasizes obtaining targeted profit margins, while minimizing the exposure to changing interest rates. In making such portfolio selections, the Company generally does not select new investments that are commonly referred to as “high yield” or “below-investment grade.” However, as described above, beginning in late 2005, the Company has allocated small portions of its investments to such securities.

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The Company also maintains a portion of its investment assets in each of the following categories: invested real estate, real estate available for sale, short-term investments, equity securities, and policy loans. Most significant has been its investment in real estate, which totaled $77.2 million at the end of 2004. This consisted almost entirely of the Company’s prior investment in River Place Pointe, a seven-building office complex in Austin, Texas. The Company occupies one of the buildings as its home office. This home office building, which represented an additional investment of $13.6 million at December 31, 2004, is classified as “real estate held for use” on the Company’s consolidated balance sheet as of that date. The River Place Pointe development, completed in 2002, was 66% leased as of March 31, 2005 (excluding the Company’s home office building). The Company sold the River Place Pointe development on June 1, 2005, for a total consideration of $103 million. The Company will realize a gain of $10.1 million on the sale, which includes both a current 2005 realized gain of $8 million and a deferred gain of $2.1 million to be recognized over the period from the sale date through March 31, 2008.

For a further discussion of FIC’s invested assets, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations - Investments.”

Operations and Data Processing

Operations.During 2004, the Company completed the process of consolidating all of its insurance operations to its home office in Austin, Texas. The Company had previously conducted its day-to-day insurance operations in both its home office and a separate facility in Seattle, Washington for Family Life. It also maintained a substantial records storage facility in Seattle. During the second half of 2003 and the first quarter of 2004, the Company moved its Family Life operations from Seattle to Austin. The consolidation of its insurance operations allowed the Company to eliminate its Seattle staff without any increase in staffing in Austin. As part of this facility closure and resulting employee terminations, severance benefits were paid to employees. Severance costs incurred in 2004 and 2003 were $83,000 and $170,000, respectively.

Overall, the Company has reduced its staffing from its highpoint of 318 in June 2003 to 173 as of December 31, 2004, and to 139 as of June 30, 2006, thereby substantially reducing operating costs. Through ongoing improvements in systems and in operating procedures and efficiencies, the Company is seeking to make additional improvements in its operating costs per policy.

Data Processing. The Company provides for its data processing and control needs with modern industry-standard mainframe equipment, supplemented by network computing utilizing multiple servers. Current versions of the operating system and file maintenance software have been installed and are in operation. The Company maintains its own web sites, and separate sites for the policyholders and the agents of both of the insurance affiliates. The Company believes it has the capacity with existing systems to handle substantial increases in its business, and expects no significant additional investments in data processing facilities would be required for such increases. The Company expects to make additional efforts in the future to improve work processes and reduce expense levels.

Reinsurance and Reserves

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

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

On certain products being written by FIC’s insurance subsidiaries (which amounted to approximately 55% of new business written in 2004), the risk was reinsured on a percentage basis with Family Life retaining either 50% or 10% of the risk depending on the face amount of the policy. The reinsurer on this portion of the business, as part of its general withdrawal from the life reinsurance market, terminated these reinsurance agreements with respect to new business written on and after January

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

Family Life and Investors Life maintain reinsurance treaties under which they reinsure all of the mortality risks under accidental death benefit policies.

In December 1997, FIC’s life insurance subsidiaries entered into a reinsurance treaty under which most of the contractual obligations and risks under accident and health and disability income policies were assumed by a third-party reinsurer.

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

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

Regulation

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

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

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

As of the date of this report, the Company’s insurance subsidiaries are current in their filing obligations with respect to unaudited statutory financial statements. The audited statutory financial statements of the insurance subsidiaries for the year ended December 31, 2004, (“2004 Audited Financial Statements”), were due during the month of June 2005. Family Life filed its 2004 Audited Financial Statements on February 17, 2006. Investors Life filed its 2004 Audited Financial Statements on May 3, 2006. As the Company and its insurance subsidiaries work to become current in their financial statement filings, it will continue to provide the domiciliary state regulatory agency (the Texas Department of Insurance) with periodic information regarding the operations of the Company and its insurance subsidiaries. The 2005 audited statutory financial statements of the insurance subsidiaries were filed on July 10, 2006 to the Texas Department of Insurance.

A number of states regulate the manner and extent to which insurance companies may test for acquired immune deficiency syndrome (AIDS) antibodies in connection with the underwriting of life insurance policies. To the extent permitted by law, the Company's insurance subsidiaries consider AIDS information in underwriting coverage and establishing premium rates. An

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evaluation of the financial impact of future AIDS claims is extremely difficult, due in part to insufficient and conflicting data regarding the incidence of the disease in the general population and the prognosis for the probable future course of the disease.

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

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

Solvency Laws Assessments. The solvency or guaranty laws of most states in which an insurance company does business may require that company to pay assessments (up to certain prescribed limits) to fund policyholder losses or liabilities of insurance companies that become insolvent. Insolvencies of insurance companies increase the possibility that such assessments may be required. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer’s financial strength and, in certain instances, may be offset against future premium taxes. The insurance companies record the effect for guaranty fund assessments or credits in the period such amounts are probable and can be reasonably estimated.

Dividends. Dividends paid by FIC’s insurance company subsidiaries are a source of cash for FIC to make payments of principal and interest on its debt. Under current Texas law, any proposed payment of an “extraordinary dividend” requires a 30-day prior notice to the Texas Insurance Commissioner, during which period the Commissioner can approve the dividend, disapprove the dividend, or fail to comment on the notice, in which case the dividend is deemed approved at the end of the 30-day period. An “extraordinary dividend” is a distribution which, together with dividends or distributions paid during the preceding twelve months, exceeds the greater of (i) 10% of statutory surplus as of the preceding December 31st or (ii) the statutory net gain from operations for the preceding calendar year. Payment of a regular dividend requires that the insurer’s earned surplus after dividends or distributions must be reasonable in relation to the insurer’s outstanding liabilities and adequate to its financial needs. Prior to the transfer of the domicile of Family Life and Investors Life from Washington to Texas in March 2004, the provisions of the Washington Insurance Code applied to the payment of dividends from the insurance subsidiaries to FIC. The provisions of the Washington Insurance Code applicable to the payment of dividends and extraordinary dividends by an insurance company are substantially similar to the provisions of Texas law described above. In 2003, 2004 and 2005, Family Life and Investors Life did not make any dividend payments to FIC. Family Life had earned surplus of ($4.3) million and $(7.3) million at December 31, 2004, and December 31, 2005, respectively, and a net loss from operations of $2.2 million for 2004 and $4.5 million for 2005. Investors Life had earned surplus of $18.5 million and $31.5 million at December 31, 2004, and December 31, 2005, respectively, and a net loss from operations of $3.9 million for 2004 and a net gain from operations of $3.3 million for 2005.

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

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

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insurance and reinsurance subsidiaries of insurance holding companies to register with the applicable state regulatory authorities and to file with those authorities certain reports describing, among other information, their capital structure, ownership, financial condition, certain intercompany transactions, and general business operations. The insurance holding company statutes also require prior regulatory agency approval, or in certain circumstances, prior notice of certain material intercompany transfers of assets as well as certain transactions between insurance companies, their parent companies, and their affiliates.

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

The insurance holding company regulations generally apply only to insurers domiciled in a particular state. The regulations in certain states also provide, however, that insurers that are “commercially domiciled” in that state are also subject to the provisions applicable to domiciled insurers. The test for determining whether an insurer is commercially domiciled is based on the percentage of premiums written in the state as compared to the amount of premiums written everywhere over a measuring period. Currently, the insurance subsidiaries of FIC are not treated as commercially domiciled in any jurisdiction.

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

USA Patriot Act. Title III of the USA Patriot Act (Public Law 107-56) (referred to in this section as the “Act”), makes a number of amendments to the anti-money laundering provisions of the Bank Secrecy Act (“BSA”). The purpose of the amendments was to facilitate the prevention, detection and prosecution of international money laundering and the financing of terrorism. The Act requires every financial institution to establish an anti-money laundering program that includes: (1) the development of internal policies, procedures, and controls; (2) the designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test programs.

In October 2002, the Department of the Treasury (“Treasury”) released an interim final rule that temporarily deferred the application of the anti-money laundering program requirements ofthe Act to certain financial institutions, including insurance companies. Although Treasury has not yet issued final regulations pertaining to insurance companies, FIC’s insurance subsidiaries have taken steps to establish an anti-money laundering program and continue to check names, involved in certain transactions, against the Specially Designated Nationals and Blocked Persons List prepared by Treasury’s Office of Foreign Assets Control. Until Treasury issues final rules regarding the insurance industry’s compliance with the anti-money laundering provisions of the Act, FIC’s insurance subsidiaries believe that it is too early to predict the Act’s long-term effects on their business.

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

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

Potential Federal Regulation. Although the federal government generally does not directly regulate the insurance industry, federal initiatives often have an impact on the business. Congress and certain federal agencies periodically investigate the

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condition of the insurance industry (encompassing both life and health and property and casualty insurance) in the United States in order to decide whether some form of federal role in the regulation of insurance companies would be appropriate. Certain policies, contracts and annuities offered by the Company’s subsidiaries are subject to regulations under the federal securities laws administered by the SEC. The federal securities laws contain regulatory restrictions and criminal, administrative and private remedial provisions. As stated above, this Form 10-K for the fiscal year ended December 31, 2004 (the “2004 Form 10-K”) is the first annual statement covering periods subsequent to December 31, 2003. Therefore, the Company is currently delinquent in its filings with the SEC, but is diligently working to become up-to-date with its required SEC filings.

Federal Income Taxation. FIC files a consolidated federal income tax return with its subsidiaries, except for Investors Life (which files a separate return) and ILG Securities (which files its own federal income tax return). In accordance with the tax allocation agreements maintained by those FIC companies that file a consolidated return, federal income tax expense or benefit is allocated to each entity in the consolidated group as if such entity were filing a separate return.

NAIC IRIS Ratios. The NAIC Regulatory Information System (“IRIS”) ratios cover 12 categories of financial data with defined “usual” ranges for each such category. The ratios are intended to provide insurance regulators with “early warnings” as to when a given company might warrant special attention. An insurance company may fall outside of the usual range for one or more ratios, and such variances may result from specific transactions that are, by themselves, immaterial or eliminated at the consolidation level. In certain states, insurers with more than three IRIS ratios outside of the NAIC usual ranges may be subject to increased regulatory oversight. For 2004, each of the Company’s insurance subsidiaries had six IRIS ratios outside of the usual ranges. However, for 2005, Family Life had five ratios, and Investors Life had two ratios which were outside the usual ranges. For Family Life, the ratios outside the usual ranges were primarily related to changes in capital and surplus, net income, investment income, and non-admitted assets. For Investors Life, the ratios outside the usual ranges were primarily related to investment income and changes in premium. Despite the IRIS ratio results for 2005, both Family Life and Investors Life continue to maintain capital and surplus positions which significantly exceed RBC and other regulatory requirements.

Competition

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

Agents placing insurance business with Family Life and Investors Life are compensated on a commission basis. Some companies pay higher commissions and charge lower premium rates than FIC’s insurance subsidiaries, and many companies have more resources than FIC’s insurance subsidiaries. In addition, consolidations of insurance and banking institutions may adversely affect the ability of Family Life to expand its customer referral relationships with mortgage lending and servicing institutions.

The Company believes it can compete effectively by focusing on markets where its approach to distribution and products provides competitive advantage. This includes initially the mortgage-protection insurance market. Family Life’s delivery system provides an advantage in the lower-income homeowner market. Also during 2004 and 2005, Family Life introduced new mortgage-related products with improved benefits and features. Investors Life has reorganized its distribution arrangements to compete more effectively in the mortgage-related market through independent brokers.

Ratings

FIC’s life insurance subsidiaries are rated by A.M. Best Company, Inc. (“A.M. Best”), a nationally recognized rating agency. Insurance ratings represent the opinion of the rating agency on the financial strength of a company and its capacity to meet the obligations of insurance policies. As of June, 2006, the insurance financial strength ratings assigned by A.M. Best to Investors Life and Family Life was B- and B, respectively. In both 2004 and 2005, the ratings assigned by A.M. Best to Investors Life and Family Life was B and B+, respectively. Prior to 2004, the rating assigned by A.M. Best to Investors Life and Family Life was B+ and B++, respectively. The Company cannot predict what actions, if any, A.M. Best may take in the future, or what actions the Company may take in response to such actions. A rating downgrade of either of the Company’s insurance subsidiaries by A.M. Best could adversely affect new sales of insurance products and retention of current business.

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

Employees of the Company

At December 31, 2004, the Company (including its subsidiaries) had approximately 173 employees, of whom 165 worked in the Company’s home office operations and 8 worked as field staff in the Company’s two insurance company subsidiaries. At the end of 2005, the Company relocated its field staff to the home office in Austin, Texas. At June 30, 2006, the Company had 139 employees.

Available Information

Our website address is www.ficgroup.com. We make our website content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this Form 10-K. We make available on the investor relations section of this website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports promptly after we electronically file those materials with, or furnish those materials to, the SEC. Our Code of Ethics for Senior Executive and Financial Officers is also available on the investor relations section of our website. We will post any amendments to or waivers from a provision of our Code of Ethics for Senior Executive and Financial Officers on the same section of our website. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including us.

ITEM 1A.      RISK FACTORS RELATED TO OUR COMPANY

The reader should carefully consider the following risks, as well as the other information contained in this Form 10-K. The risks and uncertainties described below are not the only ones facing our Company. Although significant resources have been devoted to developing risk management policies and procedures, we may be exposed to unidentified or unanticipated risks which could negatively affect our financial position and earnings. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially adversely affected. In that case, the value of our common stock could decline substantially. You should also refer to the other information set forth in this Form 10-K, including our consolidated financial statements and related notes.

FIC is a holding company and relies on dividends from its insurance subsidiaries; state insurance laws may restrict the ability of these subsidiaries to pay dividends.

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

Applicable state insurance laws generally restrict the ability of insurance companies to pay cash dividends in excess of prescribed limitations without prior approval. The ability of Family Life and Investors Life to pay shareholder dividends is subject to restrictions set forth in the insurance laws and regulations of Texas, their domiciliary state since March 2004. Under current Texas law, any proposed payment of an “extraordinary dividend” requires a 30-day prior notice to the Texas Insurance Commissioner, during which period the Commissioner can approve the dividend, disapprove the dividend, or fail to comment on the notice, in which case the dividend is deemed approved at the end of the 30-day period. An “extraordinary dividend” is a distribution which, together with dividends or distributions paid during the preceding twelve months, exceeds the greater of (i) 10% of statutory surplus as of the preceding December 31st or (ii) the statutory net gain from operations for the preceding calendar year. Payment of a regular dividend requires that the insurer's earned surplus after dividends or distributions must be reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs. Prior to the transfer of the domicile of Family Life and Investors Life from Washington to Texas, the provisions of the Washington Insurance Code applied to the payment of dividends from the insurance subsidiaries to FIC. The provisions of the Washington Insurance Code applicable to the payment of dividends and extraordinary dividends by an insurance company are substantially similar to the provisions of Texas law described above. In 2003, 2004 and 2005, Family Life and Investors Life did not make any dividend payments to FIC. Family Life had statutory earned surplus (deficit) of ($4.3) million and $(7.3) million at December 31, 2004, and December 31, 2005, respectively, and a statutory net loss from operations of $2.2 million for 2004 and $4.5 million for

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2005. Investors Life had statutory earned surplus of $18.5 million and $31.5 million at December 31, 2004, and December 31, 2005, respectively, and a statutory net loss from operations of $3.9 million for 2004 and a statutory net gain from operations of $3.3 million for 2005.

FIC may not be able to compete with larger, more established insurance companies.

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

• the general level of premium rates for comparable products;

• the extent of individual policyholders services required to service each product category;

• general interest rate levels;

• competitive commission rates and related marketing costs;

• legislative and regulatory requirements and restrictions;

• the impact of competing insurance and other financial products; and

• the condition of the regional and national economies.

In certain circumstances, regulatory authorities may place our insurance subsidiaries under regulatory control.

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

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

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

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

Our insurance subsidiaries may be required to pay assessments to fund policyholder losses or liabilities; this may have a material adverse effect on our results of operations.

The solvency or guaranty laws of most states in which our insurance companies conduct business may require the Company to pay assessments (up to certain prescribed limits) to fund policyholder losses or liabilities of insurance companies that become insolvent. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer’s financial strength and, in certain instances, may be offset against future premium taxes. We cannot estimate the likelihood and amount of future assessments. Any future assessments may have a material adverse effect on our results of operations.

Our insurance subsidiaries are subject to regulation by state insurance departments.

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FIC’s insurance subsidiaries are subject to regulation and supervision by the states in which they are licensed to do business. This regulation is designed primarily to protect policy owners. Although the extent of regulation varies by state, state insurance departments have broad administrative powers relating to the granting and revocation of licenses to transact business, licensing of agents, the regulation of trade practices and premium rates, the approval of form and content of financial statements and the type and character of investments.

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

The federal government may seek to regulate the insurance industry.

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

The enactment of federal privacy legislation, such as the Gramm-Leach-Bliley Act (as it relates to the use of medical and financial information by insurers) may result in additional regulatory compliance costs, limit the ability of our insurance subsidiaries to market their products or otherwise constrain the nature and scope of our operations.

Failure of the Company to be current in its SEC reports and the delisting of our common stock from Nasdaq may have adverse effects on the Company and its shareholders.

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

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

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

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

As more fully described under Item 9A, Controls and Procedures, our management identified numerous material weaknesses over the effectiveness of our internal controls over financial reporting. As a result of the material weaknesses, management concluded that, as of December 31, 2004, we did not maintain effective internal control over financial reporting.

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

We have implemented initiatives to remediate the material weaknesses in our internal controls. The steps we have taken and are taking to address the material weaknesses may not be effective. Any failure to effectively address a material weakness or other control deficiency or implement required new or improved controls, or difficulties encountered in their implementation, could limit our ability to obtain financing, harm our reputation, further delay our plan to become current in our SEC reports, disrupt our ability to process key components of our result of operations and financial condition timely and accurately and cause us to continue to fail to meet our reporting obligations under rules of the SEC.

Changes to the Internal Revenue Code could have a material adverse effect on our results of operations.

Currently, under the Internal Revenue Code, holders of many life insurance and annuity products, including both traditional and variable products, are entitled to tax-favorable treatment on these products. For example, income tax payable by policyholders on investment earnings under life insurance and annuity products which are owned by natural persons is deferred during the product’s accumulation period and is payable, if at all, only when the insurance or annuity benefits are actually paid or to be paid.

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

Interest rate volatility may adversely affect our profitability.

Changes in interest rates affect many aspects of our business and can significantly affect our profitability. In periods of increasing interest rates, withdrawals of life insurance policies and fixed annuity contracts, including policy loans and surrenders, and transfers to separate account variable options may increase as policyholders choose to forego insurance protection and seek higher investment returns. Obtaining cash to satisfy these obligations may require us to liquidate fixed income investment assets at a time when the market prices for those assets are depressed because interest rates have increased. This may result in realized investment losses. Regardless of whether we realize an investment loss, these cash payments would result in a decrease in total invested assets and may result in a decrease in net income. Policy surrender charges may offset or minimize the negative effect to net income in the period of the surrender. Premature withdrawals may also cause us to accelerate amortization of policy acquisition costs, which would also reduce our net income.

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

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The profitability of our spread-based business depends in large part upon our ability to manage interest rate spreads, and the credit and other risks inherent in our investment portfolio. We cannot guarantee, however, that we will manage successfully our interest rate spreads or the potential negative impact of those risks.

The price of shares of our common stock can fluctuate as a result of a variety of factors, many of which are beyond our control.

The factors which can cause the price of shares of our common stock to fluctuate include, among others:

• quarterly variations in our operating results;

• operating results that vary from the expectations of management, securities analysts and investors;

• changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

• developments generally affecting the insurance industry;

• announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;

• announcements by third parties of significant claims or proceedings against us;

• our dividend policy;

• the relatively low trading volume of our common stock;

• future sales of our equity or equity-linked securities;

• delinquency in the filing of required financial statements;

• natural disasters and terrorist attacks; and

• general domestic and international economic conditions.

In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the market price of our common stock.

Sales of a significant number of shares of our common stock in the public market, or the perception of such sales, could reduce our share price and impair our ability to raise funds in new share offerings.

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

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

We are subject to state statutes governing insurance holding companies, which generally require that any person or entity desiring to acquire direct or indirect control of any of our insurance company subsidiaries obtain prior regulatory approval. Control would be presumed to exist under most state insurance laws with the acquisition of 10% or more of our outstanding voting securities. Applicable state insurance company laws and regulations could delay or impede a change of control of our Company, which could prevent our shareholders from receiving a control premium.

Our reserves established for future policy benefits and claims may prove inadequate, requiring us to increase liabilities.

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

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

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

Financial strength ratings are important factors in establishing the competitive position of insurance companies. A rating downgrade, or the potential for such a downgrade, of either of our insurance subsidiaries could, among other things:

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

• result in the termination of our relationships with agents and other distributors of our products and services; and

• reduce new sales.

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

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

We may require additional capital in the future that may not be available or only available on unfavorable terms.

FIC’s future capital requirements depend on many factors, including its ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. To the extent that FIC needs to raise additional funds, any equity or debt financing for this purpose, if available at all, may be on terms that are not favorable to it. If FIC cannot obtain adequate capital, its business, results of operations and financial condition could be adversely affected.

Our policy claims fluctuate from period to period, and actual results could differ from our expectations.

Our results may fluctuate from period to period due to fluctuations in policy claims received by the Company. Family Life and Investors Life may experience higher claims if the economy is growing slowly or in recession, or equity markets decline.

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

Our results may be negatively affected should actual experience differ from management’s assumptions and estimates.

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

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

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

Reinsurance may not be available or adequate to protect us against losses, and we are subject to the credit risk of reinsurers.

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

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

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

General economic, financial market and political conditions may adversely affect our results of operations and financial condition.

Our results of operations and financial condition may be materially adversely affected from time to time by general economic, financial market and political conditions. These conditions include economic cycles such as:

• insurance industry cycles;

• levels of employment;

• levels of consumer lending;

• levels of inflation; and

• movements of the financial markets.

Fluctuations in interest rates, monetary policy, demographics, and legislative and competitive factors also influence our performance. During periods of economic downturn:

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

• new disability insurance claims and claims on other specialized insurance products tend to rise;

• there is a higher loss ratio on credit card and installment loan insurance due to rising unemployment levels; and

• insureds tend to increase their utilization of health and dental benefits if they anticipate becoming unemployed or losing benefits.

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

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

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

• inadequate information on which to base pricing, underwriting and reserving decisions;

• the loss of existing customers;

• difficulty in attracting new customers;

• customer, provider and agent disputes;

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

• litigation exposure; or

• increases in administrative expenses.

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

ITEM 1B.      UNRESOLVED STAFF COMMENTS

Not applicable. 

ITEM 2. PROPERTIES

FIC’s home office is located at River Place Pointe, 6500 River Place Blvd., Building One, Austin, Texas. River Place Pointe was purchased by Investors Life in October 1998. It consisted of approximately 48 acres of land in Austin, Texas. The aggregate purchase price for the undeveloped land was $8.1 million. The site development permit allowed for the construction of seven office buildings totaling 600,000 square feet, with associated parking, drives and related improvements. The Company completed construction of the first section of the project, which consists of four office buildings, an associated parking garage and related infrastructure, during 2000 and 2001. It completed the second phase of construction, which included three more office buildings, an associated parking garage and related infrastructure, in 2002. FIC and its insurance subsidiaries occupy Building One of River Place Pointe, consisting of approximately 76,143 square feet of space, and, for part of 2005, also occupied approximately 5,000 square feet of Building Four for records storage. On June 1, 2005, the Company sold River Place Pointe to a non-affiliated party, in a cash transaction for a gross purchase price of $103 million. Under the terms of the sale agreement, Investors Life entered into a lease with the purchaser with respect to all of the space in Building One, for a five-year term at a rate of $28.00 per square foot, which is above the market rate in effect in June 2005, but was the prevailing rental rate at the time that FIC and its subsidiaries occupied the building in July 2000. The lease provides Investors Life with a right of cancellation of the lease at March 31, 2008.

The Company also leases approximately 10,000 square feet in Cedar Park, Texas, to house the company’s printing operations and warehouse storage. The monthly rental for the Cedar Park facility is $9,123. The lease terms ends on February 28, 2007.

Family Life and Investors Life leased approximately 7,700 square feet of space in an office building in Seattle, Washington, which served as the statutory home office of the insurance companies. In addition, the insurance companies leased 22,100 square feet of warehouse space in Tukwila, Washington. The leases for each of these facilities expired on November 30, 2003, and were extended on a month-to-month basis, pending completion of the regulatory approval of the redomestication of the insurance companies from Washington to Texas. The lease for office space in Seattle was terminated on March 31, 2004. The lease for the warehouse space was terminated on February 29, 2004. For 2004, the combined monthly rental expense for these facilities was $24,891.

A subsidiary of FIC leased a building located at 40 Parker Road, Elizabeth, New Jersey. This building contains approximately 41,400 square feet of office space. The lease, which was entered into in December 1985 and expired in December 2005, called for an annual rental of $798,456 effective January 1, 2004; the actual rental charge for 2004 was $736,961. The lease provided that all costs including, but not limited to, those for maintenance, repairs, insurance and taxes be borne by FIC; these costs amounted to $331,685, $316,392, and $306,505 in 2004, 2003 and 2002, respectively. FIC subleased this space to third parties,

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

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

ITEM 3. LEGAL PROCEEDINGS

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

T. David Porter v. Financial Industries Corporation

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

Litigation with Otter Creek Partnership I, L.P.

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

In connection with this solicitation of proxies, on June 13, 2003, Otter Creek Partners commenced a lawsuit in the District Court in Travis County, Texas, Cause No. GN302872 (the “Litigation”) seeking, among other things, to compel the Company to hold the previously delayed 2003 Annual Meeting. Otter Creek also sought in the Litigation to neutralize the effect of a proxy obtained by the Company from the Mitte Family (the “Mitte Proxy”) the preceding month whereby the incumbent board was able to vote 1,627,610 shares in favor of its nominees.

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

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

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

Litigation with Former Employee of Subsidiary

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

In November 2003, Mr. Johnson and his wife, Carol Johnson, filed suit in Harris County, Texas District Court against the Company, FIC Financial Services, Inc. (“FICFS”) and an employee of the Company. The suit, which sought an unspecified amount of damages and injunctive relief, alleges that the defendants interfered with the non-JNT contract and business relationships of the plaintiffs, made slanderous statements regarding the plaintiffs, and accessed computer files at the JNT offices relating to the non-JNT business relationships of the plaintiffs, without the consent of the plaintiffs. The suit also alleged conspiracy, conversion, and various other torts, all related to the defendants’ investigation of plaintiff’s business practices at JNT.

Subsequently, Mr. Johnson filed a demand for arbitration under his employment agreement, which has a mandatory arbitration clause. In the arbitration, Mr. Johnson sought damages for breach of contract and various other benefits relating to the termination of his employment contract, totaling $913,133.40. In connection with the arbitration, FIC submitted a counter-claim, alleging that Mr. Johnson committed multiple breaches of his employment agreement, and that he breached his fiduciary duty to FIC as a result of his actions in conducting the business of JNT, thereby entitling FIC to a dismissal of plaintiff’s claims. Prior to the hearing on the arbitration, the Harris County Court ordered that the matters raised in that lawsuit by Mr. Johnson (though not Carol Johnson) be combined with the arbitration.

An arbitration hearing on Johnson’s contract claims was conducted in April 2005. On July 21, 2005, the Arbitrator issued an interim award in which he denied all of Johnson’s claims for breach of contract, as well as Johnson’s claims with respect to the restricted shares of FIC stock. In denying Johnson’s claims, the Arbitrator concluded that:

(1) Johnson had committed multiple and material breaches of his employment agreement by operating a personal tax and accounting business out of office space and using employees, utilities and other items, all paid for by FICFS; by engaging in a self-dealing transaction involving the payment to himself of $25,000 out of funds held by JNT in a

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suspense account, an account to which JNT owed fiduciary duties to its customers and clients; and by firing an employee of JNT on the same day that the employee inquired about possible workers compensation benefits in connection with an on-the-job injury,

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

(3) the change in the majority of the Board of Directors of FIC resulting from the 2003 Annual Meeting of FIC’s shareholders did not constitute a “change of control” under Johnson’s employment agreement, thereby denying Johnson’s claim that he was entitled to a “good reason” termination of his employment agreement.

In addition, the Arbitrator awarded FICFS $28,000, plus interest at the rate of 6% per annum from July 21, 2005, to the date of payment, with respect to Johnson’s unauthorized conversion of funds held in the JNT suspense account. The order confirming the arbitration award was signed on February 27, 2006, by the Harris County district judge and the Company is currently pursuing collection of the judgment. No amounts have been recorded in the Company’s consolidated financial statements for such judgment.

With respect to the matters raised by Mr. Johnson in the Harris County lawsuit, which were referred by the Court to the arbitration, following his loss in the arbitration of the employment agreement, Mr. Johnson notified the Arbitrator that he would not pursue arbitration of his other claims. In addition, in May 2006, Mrs. Johnson filed a notice of non-suit with respect to the claims made by her in the Harris County lawsuit. Accordingly, this matter is now closed.

Litigation with Equita Financial and Insurance Services of Texas, Inc. and M&W Insurance Services, Inc.

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

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

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

Deposition discovery with respect to both the case filed by Equita and M&W, and the claims in intervention asserted by Family Life and Investors Life, is set to begin in October of 2006.

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In response to a motion for partial summary judgment, the Company has stipulated to certain elements of some of the causes of action asserted by Equita and M&W, including that certain representations and warranties made in the Option Agreement were partially incorrect, and that FIC was unable to comply with certain of its obligations under the Option Agreement. FIC did not stipulate, and continues to dispute, other elements of certain of the causes of action asserted by Equita and M&W, and disputes other causes of action in their entirely. FIC intends to vigorously oppose the lawsuit and any effort by Equita and M&W to recover damages from FIC, and the life insurance subsidiaries intend to vigorously prosecute their claims in intervention against Equita.

Shareholder Claim

As reported in its Annual Report on Form 10-K for the year ended December 31, 2003 (the “2003 Form 10-K”), under “Item 3-Legal Proceedings-Shareholder Claim,” the Company received a demand letter in April 2004 from a law firm representing an individual shareholder (Mr. Cook) who owns 530 shares of the Company’s common stock, which letter set forth certain allegations and notified the Registrant that the shareholder intended to file a shareholder derivative lawsuit (the “Demand Letter”). A detailed description of the claims raised by the individual shareholder, and the actions taken by the Special Litigation Committee appointed by the Company’s Board of Directors to conduct a review of such claims, is set forth in the 2003 Form 10-K.

In May 2004, FIC, by and through its Special Litigation Committee, filed a petition in the 250th District Court of Travis County, Texas (the “Court”), seeking to have the Court appoint a panel of independent and disinterested persons pursuant to Section H (3) of Article 5.14 of the Texas Business Corporation Act to investigate the allegations, and stay any shareholder derivative actions. Subsequently, on June 1, 2004, the Court issued an Order appointing Eugene Woznicki, Kenneth S. Shifrin, John D. Barnett and F. Gary Valdez as a panel of independent and disinterested persons (the “Panel”) to make determinations contemplated by Section F of Article 5.14 of the Texas Business Corporation Act in connection with the Demand Letter and staying any shareholder derivative actions relating to the letter until the Panel’s review was completed and a determination was made by the panel as to what, if any, further action was to be taken. Messrs. Woznicki, Shifrin and Barnett are independent directors of FIC. Mr. Valdez is neither a director nor an employee of FIC. Mr. Valdez is the founder and president of Focus Strategies, L.L.C. and is active in various community and civic organizations in the Austin, Texas area.

Following an extensive review of the claims made by the individual shareholder, the Panel, in January 2005, filed with the court a Petition for Declaratory Judgment pursuant to the Texas Declaratory Judgments Act and Article 5.14 of the Texas Business Corporations Act (the “Petition”). The Petition describes the process used by the Panel and its counsel in considering the matters raised in the Demand Letter and the submittal provided by counsel for the shareholder. The Petition advised the Court that, after consideration of the evidence obtained through its inquiry, the Panel had unanimously made a good faith determination that the continuation of the Committee’s derivative proceeding and the commencement of any further derivative proceedings based on the allegations made by the individual shareholder was not in the best interests of FIC.

On October 10, 2005, the 250th District Court of Travis County, Texas, heard for trial on the merits the matters raised by the Panel in the Petition (Financial Industries Corporation v. Tom Cook (Cause No. GN 401513). After consideration of the pleadings, evidence and authorities submitted by counsel for the Company, the Court issued a Final Judgment on October 10, 2005, in which it ruled that the determinations made by the Panel, as reflected in a report submitted to the Court by a Special Litigation Committee appointed by the Registrant’s Board of Directors, were made: (1) in good faith, (2) after the Panel conducted a reasonable inquiry, and (3) based on the factors deemed appropriate under the circumstances by the Panel. The Court’s ruling otherwise dismissed with prejudice the derivative proceedings involved in this matter. The Final Judgment was approved as to form and substance by counsel for the Registrant and by counsel for the defendant.  

Management Conclusion on Legal Proceedings

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

Other Litigation

FIC and its insurance subsidiaries are regularly involved in litigation, both as a defendant and as a plaintiff. The litigation naming the insurance subsidiaries as defendant ordinarily involves our activities as a provider of insurance products.

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Management does not believe that any of this other litigation, either individually or in the aggregate, will have a material adverse effect on the Company’s business or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2004.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED HOLDER MATTERS

Market Information

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

The following table sets forth the quarterly high and low closing prices for FIC common stock for 2005, 2004 and 2003. Quotations are furnished by the Nasdaq and, for periods subsequent to June 30, 2004, the National Quotation Bureau’s Pink sheet quotation service.

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

Holders

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

Dividends

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

The ability of an insurance holding company, such as FIC, to pay dividends to its shareholders may be limited by the Company’s ability to obtain revenue, in the form of dividends and other payments, from its subsidiaries. The right of FIC’s insurance subsidiaries to pay dividends is restricted by the insurance laws of their domiciliary state. See Item 1, Description of the Business - Regulation - Dividends. Further, Family Life Corporation, which holds all of the stock of Family Life, is restricted from paying dividends on its common stock by the provisions of the $30 million note held by Investors Life. FIC (as

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the successor to the obligations of Family Life Insurance Investment Company) is also prohibited from paying dividends on its stock by the provisions of the $4.5 million note held by Investors Life. To provide for the payment of the cash dividends declared in 2002, FIC received waivers from Investors Life of the above-described restrictions of the notes, thereby permitting FIC to make the dividend payments to its shareholders.

Equity Compensation Plans

The following table presents information regarding the Company’s equity compensation plans as of December 31, 2004:

		(a)	(b)	(c)
Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans
	approved by security holders	-	-	-
Equity compensation plans not
	approved by security holders (1) (2) (3)	170,000	$              13.91	-
Total		170,000	$              13.91	-

(1) Includes options granted by FIC in January 2004 to J. Bruce Boisture, in connection with his election as Chief Executive Office and President of FIC, as follows: an option to purchase 150,000 shares of its common stock at a per share price of $14.00. The grant was conditioned upon the approval by the shareholders of FIC of the Incentive Stock Plan pursuant to which the grant would be made. As of the date of this report, the Incentive Stock Plan has not been presented to the shareholders of FIC for approval. In connection with the resignation of Mr. Boisture in November 2005, the grant was cancelled and replaced by an agreement under which FIC would issue 60,000 shares of its common stock to Mr. Boisture on or before June 30, 2007, provided that the Incentive Stock Plan is approved by FIC’s shareholders. If such approval is not so obtained by June 30, 2007, Mr. Boisture would receive a cash payment of $465,000, less applicable tax withholding. The table includes the number of shares subject to the options in January 2004, which were terminated as described above.

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

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

Recent Sales of Unregistered Securities

During the year ended December 31, 2004, FIC did not make any sales of securities that were not registered under the Securities Act of 1933, as amended (the “Securities Act”).

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

The following selected consolidated financial data includes the accounts of Financial Industries Corporation and its subsidiaries. This financial data has been restated, as more fully described in Item 7-Management’s Discussion and Analysis  

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of Financial Condition and Results of Operations and in Note 2, “Restatement of Previously Issued Financial Statements” in the accompanying consolidated financial statements.

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

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⁽¹⁾ The Company restated prior financial statements for the effects of errors as disclosed in Note 2 to the consolidated financial statements and Item 7. Amounts included herewith are derived from the effects of these restatements on the consolidated financial statements presented in the 2003 Form 10-K. Amounts included in the original Forms 10-K for the years ended December 31, 2003, 2002, 2001, and 2000 should no longer be relied upon.

In 2002, net income and earnings per share were affected by the cumulative effect of a change in accounting principle of $4.1 million. This amount represents the excess of fair value of net assets acquired over cost as of the beginning of 2002 related to the merger of ILCO with and into a subsidiary of FIC on May 18, 2001. The Company recorded this cumulative effect in conjunction with adopting Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations,” in the first quarter of 2002, as required by SFAS 141. Please refer to Note 1 in the accompanying consolidated financial statements.

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

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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

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

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

Introduction

Financial Industries Corporation (“FIC” or the “Company”) is a holding company engaged through its subsidiaries in the business of marketing, underwriting and servicing life insurance and annuity products in 49 states, the District of Columbia and the U.S. Virgin Islands. Like other financial intermediaries, FIC earns income principally based on the “spread” between what it pays its customers (death benefits, interest on funds on deposit) and what it earns on the money (premiums, policy and annuity deposits) its customers place in its care. Its long-term viability, profitability, and growth depend on FIC’s ability to manage both sides of this spread (investment of assets and pricing of liabilities), to keep its operating expenses reasonable, and to attract a sufficient volume of new deposits (by selling new insurance policies and annuities) to more than replace the inevitable withdrawal (through deaths, policy cancellations, and annuity contract surrenders) of funds currently in its keeping.

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

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

FIC incurred a net loss of $14.3 million in 2004. In addition to the impact of lower interest rates on its investment income, this loss reflected a decline in premium revenues, increases in policyholder benefits and amortization of deferred policy acquisition costs and significant auditing, accounting, consulting and legal fees associated with the 2003 restatement process of the consolidated financial statements. These items were partially offset by realized gains on investments, lower interest expense on contractholder deposit funds, and lower amortization of present value of future profits of acquired business.

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

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

Restatement of Previously Issued Financial Statements

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

In the course of the Company’s work on its insurance company subsidiaries’ 2004 statutory financial statements the Company identified significant adjustments relating to 2003 and other prior periods. The Company initially announced these findings in its Form 12b-25 filing for the year ended December 31, 2005, and that the Company was analyzing the possible impact of these adjustments on the consolidated financial statements included in its 2003 Form 10-K.

Upon additional analysis of the statutory adjustments, the Company determined that the accounting errors also affected its consolidated financial statements prepared in accordance with generally accepted accounting principles as included in its previously filed 2003 Form 10-K. The Company disclosed this determination in a Form 8-K filing on April 12, 2006, along with management’s and the Board of Director’s conclusion that the Company would be required to restate its consolidated financial statements for 2003 and prior years. Subsequent to this determination, the Company continued to work on the completion of its consolidated financial statements for 2004. This work resulted in the identification of additional adjustments affecting 2003 and prior years. The details of the significant adjustments and resulting restatement are described below and in Notes 2 and 19 of the accompanying consolidated financial statements.

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Restatement. The aggregate effect of the restatement for accounting errors decreased the opening balance of shareholders' equity at January 1, 2002 (for the effect on shareholders' equity of the correction of accounting errors occurring in years prior to 2002) and the shareholders' equity at December 31, 2002 and 2003, respectively, by $2.1 million, $4.6 million and $4.8 million, as follows:

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

These adjustments have been classified into the following areas:

Policy liabilities and Contractholder Deposit Funds – Following the filing of its 2003 Form 10-K, the Company engaged a new actuarial consulting firm to assist with the Company’s actuarial functions and the actuarial processes affecting financial statement preparation. The Company, along with the new firm, performed various reviews of the actuarial policy reserving process. Through this review, errors in the Company’s 2003 and prior year consolidated financial statements were identified relating to policy liabilities and contractholder deposit funds as described below.

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

Another significant adjustment related to contractholder deposit funds for annuity policies. Several annuity policies were misidentified in prior years as variable annuities and excluded from policy liabilities. Upon additional review, these policies have been appropriately identified as general account policies and included in the Company’s contractholder deposit fund liabilities.

As a result, corrected calculations and reserving processes for these policies were performed and the liability balances were increased for these corrections totaling $6.5 million, specifically, contractholder deposit funds totaling $4.8 million and future policy benefits totaling $1.7 million.

The Company also determined that there were errors in its process for calculating the liability for premiums received in advance related to policies processed on one of its policy administration systems. As a result, the Company developed a new program to correct the advance premium calculation process resulting in an increase to this liability of $365,000.

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Various other errors were identified resulting in corrections primarily related to paid-up insurance coverages, manual policy processing, and accumulation of GAAP policy reserves and related reinsurance reserve credits. These resulted in an increase to reinsurance receivables of $291,000, with a reduction in future policy benefits of $17,000.

Reinsurance – As a result of the findings by a significant reinsurer and issues identified by the Company, the Company completed a comprehensive review of its reinsurance administrative systems. These systems generally rely on manual interface with the Company’s policy administration systems and general ledger. This manual interface, along with changes in retention policies which are based on covered individuals, resulted in errors in premiums ceded. As a result, restatement adjustments totaling $668,000 were made to appropriately cede premiums and reduce reinsurance receivables in accordance with the reinsurance agreements with various reinsurers.

Present Value of Future Profits of Acquired Businesses (PVFP) – The Company recorded a restatement adjustment totaling $56,000 for the amortization of PVFP in 2003 related to the correction of certain policy in-force data.

Excess of Net Assets Acquired Over Cost – In connection with the 2001 acquisition of ILCO, the Company allocated the purchase price to the fair value of the assets acquired and liabilities assumed in accordance with the purchase method of accounting resulting in the recognition of an excess of net assets acquired over cost, also referred to as negative goodwill. Prior to its acquisition of ILCO’s remaining outstanding common shares on May 18, 2001, the Company accounted for ILCO under the equity method of accounting. The Company owned approximately 48% of ILCO’s common shares prior to May 18, 2001. The restatement adjustments to the Company’s equity in earnings of affiliate are therefore equal to approximately 48% of the related adjustments to ILCO’s retained earnings and total shareholders’ equity prior to May 18, 2001. Certain restatement adjustments, therefore, affected the fair value of the net assets acquired from ILCO and the cost of the investment in ILCO resulting in a decrease of $2.7 million in the remaining unamortized negative goodwill, which was recognized as a cumulative effect of a change in accounting principle in 2002 in accordance with SFAS No. 141 “Business Combinations”.

Income Taxes - -- Current and deferred Federal income tax provisions were recalculated to include the impact of the restatement adjustments as described herein, and to reflect the amount of taxes receivable from the IRS and the amount of deferred Federal income tax liability resulting from the utilization of the asset and liability method after consideration of the portion of the deferred tax asset that may not be realized pursuant to the requirements of SFAS No. 109, "Accounting for Income Taxes." The Company also determined that deferred taxes had not been established related to ILCO's pension assets. Adjustments made to decrease the income tax receivable and reduce the deferred tax liability totaled $1.9 million, including an increase to accumulated other comprehensive income of $280,000 primarily as a result of changes to the deferred tax valuation allowance applied to other comprehensive income and the recalculation of deferred income taxes applied to the Company's minimum pension liability.

Other Miscellaneous – The Company recorded the following additional restatement adjustments:

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

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

• Establish sales tax accrual on actuarial consulting fees, increasing other liabilities $79,000

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

• Reduction of accrued interest on bond for which interest received was held in suspense totaling $52,000

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

• Increase in agency receivables of $183,000

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

• Correction of agent commission liability of $255,000 and allowance for agents’ balances of $157,000 due to errors in programming of the Company’s commission rate structure totaling $98,000

• Correction of treasury stock, increasing additional paid-in capital by $524,000 and common treasury stock by $122,000 and reducing other liabilities by $646,000 as a result of treasury shares distributed in 2003 in conjunction with the acquisition of the New Era companies.  See Note 17 in the accompanying consolidating financial statements for additional details regarding the acquisition and subsequent sale of the New Era companies.

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

• Reclassifications of certain balance sheet and statement of operations items which were improperly classified,

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

In addition to the above restatements, the statement of cash flows for the year ended December 31, 2003 was also affected by the following items:

• Loss from discontinued operations of the New Era companies was shown as a separate line item, with offsetting reductions in change in agency advances ($273,000), change in other assets ($4,780,000), other ($442,000), and an increase in other liabilities of $560,000.

• Acquisition of subsidiary companies was adjusted to eliminate the net effects of changes in other assets and liabilities. Acquisition of subsidiary companies increased by $941,000, offset by reductions in other of $1,587,000, issuance of treasury stock of $646,000, and increases in change in other assets of $647,000 and change in other liabilities of $2,527,000.

• Adjustment to issuance of treasury stock of $127,000 due to issuance of treasury stock to 401(k) participants, reclassifying change to other.

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

Financial Condition

Assets

During 2004, the equity of the shareholders of the Company (that is, the excess of the Company’s assets over its liabilities) declined by $16.8 million. The predominant change in FIC’s financial condition is reflected in the net loss for the year of $14.3 million, as discussed in more detail below.

Additional changes to assets and liabilities resulting in a net decrease to shareholders’ equity totaling $2.4 million:

• $3,205,000 reduction for increases in the Company’s minimum pension liability

• $236,000 increase from change in net unrealized losses on investments in fixed maturities available for sale

• $423,000 increase from net unrealized appreciation of equity securities

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

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At the end of 2004, FIC had $880.9 million of assets under its direct management, exclusive of separate account assets. In broad terms, these funds were invested as follows:

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

Total managed assets declined during 2004 by 5.1%. The decline was primarily due to reductions in the Company’s investment securities portfolio, deferred policy acquisition costs, and present value of future profits of acquired business. The level of these reductions was significantly impacted by the net run-off of the Company’s annuity and life insurance business in-force.

During 2003, the Company reduced its investment in cash and short-term investments significantly, shifting funds to investments in debt instruments. A substantial portion of these funds, along with proceeds from maturing investments and sales, were reinvested during the first half of 2003 in assets (collateralized mortgage obligations (“CMOs”), asset-backed securities, and private placements) that the then-incumbent management of the Company expected would increase overall returns on invested assets. Following a review of the investment portfolios of the life insurance subsidiaries of the Company in September 2003, the Investment Committee of the Company’s then newly elected Board of Directors recommended the engagement of a third-party investment manager to provide ongoing, professional management of the portfolios. In October 2003, the life insurance subsidiaries entered into investment management agreements with Conning. Under these agreements, Conning manages the investment security portfolios of the Company’s life insurance subsidiaries in accordance with investment policies set by the Company’s Board of Directors.

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

Conning commenced the realignment of the Company’s life insurance subsidiaries’ portfolios in accordance with these new policies in the fourth quarter of 2003. As part of this realignment, Conning identified eight securities purchased earlier in 2003

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

The Company and Conning continued the realignment of the portfolio in 2004. During 2004, the Company decreased its investment in mortgage-backed securities (including asset-backed securities) significantly, from 53.8% to 37.4% of its total investment in fixed maturities. With the reduction of this exposure to mortgage and asset-backed securities, the Company increased its holdings in corporate securities from 33.8% to 51.4%, substantially all of which are in investment grade securities.

Mortgage-backed securities are sensitive to changes in prevailing interest rates, since interest rate levels affect the rate at which the underlying mortgage obligations are repaid. Mortgage-backed pass-through securities, sequential CMOs and support bonds, which comprised approximately 67% of the book value of FIC’s mortgage-backed securities at December 31, 2004, are sensitive to prepayment and extension risks. FIC’s insurance subsidiaries have reduced the risk of prepayment associated with mortgage-backed securities by investing in planned amortization class (“PAC”), target amortization class (“TAC”) instruments and scheduled bonds. These investments are designed to amortize in a predictable manner by shifting the risk of prepayment of the underlying collateral to other investors in other tranches (“support classes”) of the CMO. At December 31, 2004, PAC and TAC instruments and scheduled bonds represented approximately 19.8% of the book value of FIC’s mortgage-backed securities. Sequential and support classes represented approximately 23.9% of the book value of FIC’s mortgage-backed securities at December 31, 2004.

An allocation by security type of the Company’s investments in fixed maturities as of December 31, 2004 and 2003, is detailed below.

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

In addition to the realignment strategy as described above, with the low market interest rate environment during 2004, the Company also increased its level of cash and short-term investments from $82.4 million at December 31, 2003, to $114.6 million at December 31, 2004, in anticipation of an improved interest rate environment. It was also during this time that Conning and the Company completed more extensive asset/liability management and duration analysis which provided the information for more effective reinvestment of funds. As market interest rates began to rise subsequent to 2004, most of the cash and short-term investments were deployed in longer term debt securities during 2005 and the first quarter of 2006.

FIC’s equity securities consist primarily of its investment in the investment funds underlying the separate accounts business of Investors Life Insurance Company of North America (“Investors Life”). As of December 31, 2004, the market value of FIC’s equity securities was $8.5 million, compared to $7.9 million at December 31, 2003. The increase is related to an increase in the value of the funds underlying the separate accounts.

FIC’s real estate investment is primarily related to the development of the River Place Pointe project (“River Place Pointe”) by Investors Life. At December 31, 2004, FIC’s investment totaled $90.1 million in this 600,000 sq. ft., seven-building office complex on 48 acres in Austin, Texas. (For a more detailed description of the River Place Pointe project, see Item 2 -Properties.) FIC and its insurance company subsidiaries occupy one of the seven buildings. Four of the other buildings were substantially leased, but two buildings (approximately 34% of the total space in the project) remained vacant as of December 31, 2004. The project was sold in June 2005, in a cash transaction, for $103 million. The Company realized a gain of $10.1

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million on the sale, which includes both an immediate realized gain recognized in 2005 of $8 million and a deferred gain of $2.1 million to be recognized over the period from the sale date through March 31, 2008.

The costs related to acquiring new business, including certain costs of issuing policies and certain other variable selling expenses (principally commissions), are capitalized and treated as deferred policy acquisition costs (“DAC”) to be amortized over the life of the related policies. The decrease in the Company’s DAC from December 31, 2003, to December 31, 2004, reflects that the capitalization of acquisition costs associated with sales of new insurance policies was less than the amortization of such amounts capitalized in prior years. The present value of future profits of acquired business is the capitalized acquisition cost of blocks of insurance business that the Company has acquired from others in the past. This asset is amortized to expense as the profits are realized from the various blocks of acquired business and the policies in-force gradually decrease. The overall decline in these two assets reflects the net run-off in business that the Company experienced in 2004, as shown in the following table.

	December 31,			Percentage
	2004	2003	Change	Change
	(In billions, except percentages and policies in force)
Policies in force	196,623	217,123	(20,500)	-9.4%
Life insurance in force:
Traditional life insurance	5.0	5.4	(0.4)	-7.4%
Universal life insurance	4.2	4.6	(0.4)	-8.7%
Annuity funds on deposit	0.14	0.16	(0.02)	-12.5%

For prior year comparative purposes, the changes for in-force from 2002 to 2003 for policies, traditional life insurance, universal life insurance, and annuity funds on deposit were -8.4%, -11.2%, -7.7%, and 12.1%, respectively. As noted elsewhere in this report, the Company’s management views this continued net run-off in the Company’s business as detrimental to its long-term prospects and is taking steps designed to reverse this run-off.

Investors Life had $359.9 million of separate account assets as of December 31, 2004 (not including the value of the Company’s own start-up investment in one of the accounts), as compared to $358.3 million at the end of 2003. These assets include (a) two variable annuity separate accounts that permit contractholders to allocate their contract values among a selection of third-party mutual funds and (b) $329.5 million held in custodian accounts in connection with investment annuity contracts. The investment annuity business is reinsured with Symetra Life Insurance Company (formerly Safeco Life Insurance Company), a third-party reinsurer, on a 90%/10% coinsurance basis, with Investors Life retaining 10% of such business. Since the reinsurance treaty is on a coinsurance basis, Investors Life is contingently liable to the policyholders in the event that the reinsurer is unable to fulfill its obligations under the treaty. Investors Life is not marketing new separate account annuity contracts.

Effective June 1, 2006, Investors Life recaptured the previously reinsured investment annuity business with Symetra Life resulting in the retention of 100% of this business. The Company expects the recapture of this previously reinsured business to increase revenues in 2006 and future years. However, as this is a closed block of business, the revenues are expected to decrease as the policies in-force decline.

Liabilities

The Company’s insurance-related liabilities (future policy benefits and contractholder deposit funds) were $732.3 million at December 31, 2004, as compared to $763.1 million at December 31, 2003. The decrease in contractholder deposit funds and future policy benefits reflects the business run-off as previously described above. Additionally, annuity deposits received in 2004 totaling $5.8 million were significantly lower than the $22.9 million received in 2003. The decrease in annuity deposits is directly related to the Company’s decision in 2004 to temporarily discontinue the sale of fixed annuity products. Certain design features of the Company’s annuity products, coupled with competition in the annuity market and a low interest rate market environment led to this decision. The Company expects to evaluate a possible re-entry into the annuity market in the future but does not expect a current change in strategy in 2006.

Other liabilities, which totaled $29.6 million at December 31, 2004, compared to $25.3 million at December 31, 2003, consist primarily of accrued expenses, policyholder suspense liabilities, pension plan liabilities, and amounts held as agent or trustee.

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A significant development in 2004 in other liabilities is the recording of an additional minimum pension liability for the ILCO pension plan as described in more detail in Note 11 of the accompanying consolidated financial statements. The additional liability resulted primarily from a decrease in the pension plan discount rate as of December 31, 2004, consistent with the decrease in overall market interest rates.

The ILCO pension plan has an accumulated benefit obligation projected at year-end 2004 totaling $17.9 million in comparison to the fair value of plan assets of $17.6 million. The difference in these amounts reflects a minimum liability of approximately $300,000. However, because the funding position of the plan reflects a prepaid pension expense of $3.1 million at December 31, 2004, the Company was required to record the additional pre-tax liability of $3.4 million to reflect the net minimum liability of $300,000. The effects of recording the additional liability are included as a component of other comprehensive income.

In 2003, the Company borrowed $15 million through the issuance of trust preferred notes (the “2003 Notes”) to pay for its acquisition of the New Era companies and to repay advances that it had received from one of its insurance company subsidiaries for operating expenses. The 2003 Notes bear interest at the three-month LIBOR rate plus 4.2% (approximately 9.02% at April 1, 2006), not to exceed 12.5% prior to May 2008. The 2003 Notes require the payment only of interest through May 22, 2033, when the entire $15 million must be repaid, but may be repaid without any prepayment penalty after May 2008.

The entire principal amount of the 2003 Notes and any accrued but unpaid interest may become immediately due and payable upon an event of default, which includes: (1) failure to pay interest within 30 days of any due date; (2) failure to pay principal when due; (3) the bankruptcy or insolvency of FIC; or (4) the merger of FIC or sale of all or substantially all of its assets unless the successor entity to a merger is a United States corporation (or a foreign corporation that agrees to be bound by certain tax provisions). The terms of the 2003 Notes also place certain limitations on the offer or sale of securities of FIC if it would render invalid the exemption of the notes issued in connection with the loan from the registration requirements of the Securities Act of 1933. Other terms and conditions of the $15 million borrowing are described in Note 7 in the accompanying consolidated financial statements. As of December 31, 2004, the Company is in compliance with all provisions of this agreement.

Capital Adequacy

Financial intermediaries such as FIC depend on their capital to absorb short-term fluctuations in asset and liability values in their financial structures. They also count on capital to support the growth of the business. One typical measure of the strength of a financial holding company such as FIC is the simple ratio of its shareholders’ equity to its total assets. For FIC, excluding its separate account assets (which are not relevant for this purpose), at the end of 2004, this ratio was 9.9%, compared to 11.2% at the end of 2003. Management believes that its current capital is sufficient to meet the Company’s liabilities and to fund growth at currently planned levels.

FIC’s two insurance company subsidiaries are subject to regulation under state law. Among other requirements, these state laws and regulations impose capital adequacy requirements on insurance companies. Using a calculation that takes into account the quality, liquidity, maturities, and amounts of its assets and liabilities, each insurance company is required to calculate its “risk-based capital” (or “RBC”). The company’s total adjusted capital must exceed 200% of the authorized control level RBC to avoid supervisory activity by the insurance regulators. As of December 31, 2004, the total adjusted capital of FIC’s insurance subsidiaries, Family Life and Investors Life, was approximately 869% and 254% of its authorized control level risk-based capital, respectively. As of December 31, 2005, the RBC ratios for Family Life and Investors Life were 717% and 560%, respectively. The RBC ratio of Investors Life improved significantly as a result of the June 2005 sale of the River Place Pointe real estate investment. See Item 2 - Properties.

State regulators also use NAIC IRIS ratios to monitor capital adequacy requirements. The NAIC ratios cover 12 categories of financial data with defined “usual” ranges for each such category. The ratios are intended to provide insurance regulators with “early warnings” as to when a given company might warrant special attention. An insurance company may fall outside of the usual range for one or more ratios, and such variances may result from specific transactions that are, by themselves, immaterial or eliminated at the consolidation level. In certain states, insurers with more than three IRIS ratios outside of the NAIC usual ranges may be subject to increased regulatory oversight. For 2004, each of the Company’s insurance subsidiaries had six IRIS ratios outside of the usual ranges. However, for 2005, Family Life had five ratios and Investors Life had two ratios which were outside the usual ranges. For Family Life, the ratios outside the usual ranges were primarily related to changes in capital and surplus, net income, investment income, and non-admitted assets. For Investors Life, the ratios outside the usual ranges were primarily related to investment income and changes in premium. Despite the IRIS ratio results for 2005, both Family Life and

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Investors Life continue to maintain capital and surplus positions which significantly exceed risk-based capital (“RBC”) and other regulatory requirements.

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

Results of Operations

FIC incurred a net loss of $14.3 million in 2004. Comparing this result to the results in 2003 and 2002 is complicated by several factors:

• significant and unusual expenses incurred during 2004 related to accounting and auditing fees, 2003 related to compensation expenses, and 2002 related to the merger of Intercontinental Life Corporation;

• significant accounting changes in 2004 and 2002;

• discontinued operations in 2003; and

• varying federal income tax effects primarily from the establishment of and changes in a valuation allowance for deferred taxes.

In 2004, FIC’s net loss was affected by the following significant and unusual items:

(1) Significant auditing, actuarial, accounting, consulting, and legal fees were incurred in 2004, much of which was associated with the internal review of the Company’s financial accounts and resulting restatement of prior years’ consolidated financial statements as reported in its 2003 Form 10-K filing.  The total for all these expenses and fees, much of which related to the internal review, restatement and litigation matters, was approximately $8.7 million for 2004. Comparative expenses and fees for 2003 and 2002 totaled approximately $5.1 million and $2.1 million, respectively.

(2) Effective January 1, 2004, the Company adopted Statement of Position (“SOP”) 03-01, “Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts.” This resulted in recognizing additional income totaling $229,000, net of taxes, as a cumulative effect of change in accounting principle in 2004. The implementation of this SOP changed the pattern of recognition of bonus interest credited to contractholders for certain of the Company’s insurance products.

(3) Excess of cost over net assets acquired, or goodwill, totaling $752,000 was written off as an operating expense in 2004 as a result of the Company’s annual impairment analysis of such asset.

(4) $3.3 million increase in the valuation allowance related to the realization of deferred tax assets from continuing operations.

In 2003, FIC’s net loss was affected by the following significant and unusual items:

(1) $5.2 million in charges related to other than temporary impairment of securities. This adjustment resulted from an analysis of the investment portfolio that was made by the Company in connection with their regular and periodic analysis.

(2) a loss from discontinued operations of $6.1 million on the sale of the New Era companies.

(3) $2.9 million of expense related to the settlement of the litigation between FIC and Roy F. Mitte (the former Chairman and Chief Executive Officer of the Company) and the Roy F. and Joann Cole Mitte Foundation.

(4) $1.6 million paid in investment banking fees for strategic business plan reviews and in legal fees and other expenses for proxy matters and litigation related to the 2003 annual meeting of shareholders.

(5) $1.1 million for payments to be made to Jeffrey Demgen, Eugene E. Payne and George Wise pursuant to their employment agreements in connection with the termination of their employment by the Company.

(6) $0.4 million paid to William P. Tedrow in connection with the New Era acquisition in June 2003 (see Company's Quarterly Report on Form 10-Q for the three-month period ended June 30, 2003, for a further description of this payment).

(7) $2.0 million of expenses for the estimated loss for the rental and operation of a leased office building through December 2005.

(8) $3.6 million increase in the valuation allowance related to the realization of deferred tax assets from continuing operations.

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In 2002, net loss and earnings per share were affected by the cumulative effect of a change in accounting principle of $4.1 million. This amount represents the excess of fair value of net assets acquired over cost as of the beginning of 2002 related to the merger of Intercontinental Life Corporation (“ILCO”) with and into a subsidiary of FIC on May 18, 2001. The Company recorded this cumulative effect in conjunction with adopting SFAS No. 141, “Business Combinations,” in the first quarter of 2002, as required by SFAS No. 141.

The above described significant and unusual items need to be taken into consideration in drawing comparisons between the operating results in 2004 and other periods.

The Company’s revenues and net loss for years 2004, 2003, and 2002 are shown in the following table.

	Year Ended December 31,
		2003	2002
	2004	Restated	Restated
	(In millions)
Revenues	$      102.6	$     111.4	$       121.0
Net loss	(14.3)	(23.6)	(4.9)

Setting aside the effects of the unusual events mentioned above, the Company believes that the more important factors affecting its operating results during this period include the run-off in the Company’s existing book of business, coupled with relatively low sales of new business, the decline in the prevailing interest rates, and decreases in operating expenses.

Revenues

	Year Ended December 31,
		2003	2002
	2004	Restated	Restated
	(In millions)
Premiums, net	$         23.3	$         31.1	$         38.7
Earned insurance charges	41.8	40.3	41.8
Net investment income	30.7	35.3	38.1
Real estate income, net	1.8	2.4	2.9
Net realized gains (losses) on investments	2.8	(0.4)	(2.8)
Other	2.2	2.7	2.3
Total revenues	$       102.6	$       111.4	$       121.0

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Premium revenues reported for traditional life insurance products are recognized when due. Both renewal premiums and first-year premiums have declined from year to year throughout the period of 2002 through 2004, as shown in the following table. 

	Year Ended December 31,
		2003	2002
	2004	Restated	Restated
	(In millions)
Investors Life:
First year	$           0.1	$           0.4	$            0.6
Renewal	5.2	7.2	9.8
Total Investors Life net earned premiums	5.3	7.6	10.4
Family Life:
First year	2.2	1.3	3.0
Renewal	15.8	22.2	25.3
Total Family Life net earned premiums	18.0	23.5	28.3
Total net earned premiums	$         23.3	$         31.1	$          38.7

The decline in renewal premiums reflects the run-off in the Company’s existing book of business, noted above. The decrease in first-year premiums for Investors Life is attributable to the decrease in the number and value of new policies that were issued in 2004 compared to 2003 and 2002. Also, Investors Life historically has focused less on sales of traditional life insurance products, placing more emphasis on annuity and universal life insurance products. Conversely, Family Life product marketing has concentrated on sales of mortgage protection insurance which are traditional life insurance products. During 2003 and 2004, the sales organization of Family Life was extensively restructured to lower overall policy acquisition costs. Family Life also upgraded its product portfolio in 2004 to offer more competitive features and benefits. These developments were key to the increase in first year premiums in Family Life during 2004.

In accordance with GAAP, deposits received by FIC in connection with annuity contracts and premiums received for universal life (“UL”) insurance policies are reflected in FIC’s consolidated financial statements as increases in liabilities for contractholder deposit funds and not as revenues. Annual charges made against these deposits are reported as revenue. For the years 2002-2004, the table below reflects the amounts of such annuity deposits and UL premiums.

	Year Ended December 31,
	2004	2003	2002
Annuity deposits and UL premiums	(In millions)
Annuity deposits:
Investors Life	$           5.8	$        23.1	$          17.7
Family Life	-	-	0.1
Total annuity deposits	5.8	23.1	17.8
UL premiums:
Investors Life	29.7	32.8	35.2
Family Life	3.5	1.8	2.4
Total UL premiums	33.2	34.6	37.6
Total annuity deposits and UL premiums	$         39.0	$        57.7	$          55.4

The decline in UL premiums and annuity deposits in 2003 and 2004, shown in the prior table, reflects the factors noted earlier in this discussion: the net run-off of business from the Company’s existing book of business, and declining sales of new UL policies. Although the Company is focusing on reversing these trends on an overall basis, management has de-emphasized the sale of annuity and UL products in periods subsequent to 2003 due primarily to the current interest-rate environment and certain design features of FIC’s current annuity products.

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Earned insurance charges totaled $41.8 million, $40.3 million, and $41.8 million for the years ended December 31, 2004, 2003, and 2002, respectively. These revenues primarily consist of UL cost of insurance charges, but also include policy surrender charges, and policy administration charges.

Net investment income for the year ended December 31, 2004, was $30.7 million as compared to $35.3 million for the year ended December 31, 2003, and $38.2 million for the year ended December 31, 2002. The decrease in net investment income from 2003 to 2004 was primarily attributable to 1) a decline in the income received from the Company's interest-bearing investments, resulting from decreasing interest rates during 2003 and 2004 and 2) significant reinvestment of investment proceeds from sales, maturities, and mortgage-backed security prepayments in lower-yielding securities during this period. The Company's holdings of fixed maturities, trading securities, and short-term investments (including cash equivalents) are its primary interest bearing securities. Additionally, the holdings of these securities declined approximately 4.4% from 2003 to 2004 contributing to the lower net investment income. Components of net investment income by investment type are detailed below:

	Year Ended December 31,
		2003	2002
	2004	Restated	Restated
	(In thousands)
Fixed maturities	$      27,386	$      31,846	$      30,783
Other, including short-term investments and policy loans	4,036	4,177	7,487
Gross investment income	31,422	36,023	38,270
Investment expenses	(719)	(677)	(102)
Net investment income	$      30,703	$      35,346	$      38,168

Real estate revenue is primarily earned from the leases on the buildings at the Company’s River Place Pointe office complex in Austin, Texas. Net real estate income (revenues from leases less associated operating expenses and depreciation) totaled $1.8 million, $2.4 million, and $2.9 million for the years ended December 31, 2004, 2003, and 2002, respectively. The decrease in income from 2002 to 2003 was primarily attributable to higher depreciation expenses in 2003 as the final phase of construction was completed during mid-year 2002, with minimal additional leasing activity. The decrease in real estate income from 2003 to 2004 was primarily due to higher depreciation, operating expenses and real estate taxes, as gross rental income was substantially the same between years. As disclosed in more detail in Note 18 of the accompanying consolidated financial statements, the Company sold the River Place Pointe property in June 2005. Accordingly, the Company will no longer have significant real estate-related income subsequent to June 2005 as the sales proceeds were reinvested primarily in fixed maturity securities.

For the year ended December 31, 2004, FIC had a $2.8 million net realized gain on investments, compared to a $0.4 million net realized loss in 2003, and a $2.8 million net realized loss in 2002. The net realized gain for 2004 includes $1.1 million in gains on sales of fixed maturity securities and $1.7 million in gains on sales of two of the Company’s real estate properties classified as available for sale. In 2003, eight bonds were classified as other than temporarily impaired, resulting in writedowns totaling approximately $5.2 million. These bonds were subsequently sold in the fourth quarter of 2003, resulting in a small additional loss subsequent to the writedowns. The Company also sold various bonds throughout 2003 for gains that largely offset the previously described writedowns, resulting in the $0.4 million net realized loss for the year. The Company identified one bond at December 31, 2002, that was considered to be other than temporarily impaired and reduced its carrying value by $463,000. This write-down adjustment, along with an impairment-related reduction of $2.5 million in the carrying value of its equity securities, contributed $3.0 million to the net realized loss in 2002.

Benefits and Expenses

Policyholder benefits and expenses, which consist primarily of death benefit claims, totaled $47.5 million, $47.4 million, and $53.5 million for the years ended December 31, 2004, 2003, and 2002, respectively. The decrease of $6.1 million from 2002 to 2003 was primarily attributable to lower death benefit claims and a lower level of surrenders of traditional life insurance policies. Death benefits for 2003 and 2004 were at relatively comparable levels.

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Interest expense on contractholder deposit funds represents interest paid or credited to contractholders on cash values accumulated in their universal life insurance and annuity accounts. Interest expense totaled $23.2 million in 2004, $25.8 million in 2003, and $30.3 million in 2002. The decrease in interest expense in 2004 and 2003 was primarily attributable to reductions in interest rates credited to policyholders, as the Company managed its interest spread in response to the low and declining interest rates that characterized 2004 and 2003. Also contributing to the lower interest expense was a decline in universal life insurance and annuity policies in-force, as the liability for contractholder deposit funds decreased from $593.9 million at year-end 2003 to $572.1 million at year-end 2004.

The decline in market interest rates from 2001 had a negative impact on the interest spread which is the difference in the Company’s investment portfolio rate and the interest rates credited on policyholder contracts for universal life insurance and annuities. The Company responded to the lower market rates by lowering many of the credited rates on its policies during 2003 and 2004. However, universal life insurance and annuity policies have contractual minimum guaranteed rates and credited rates cannot be lower than such minimums. Because many of the Company’s policies have minimum guaranteed rates of 4.0%, the market interest rate environment in recent years has put pressure on the Company’s interest spread.

Amortization of deferred policy acquisition costs (DAC) decreased from $11.0 million in 2002 to $9.8 million in 2003 but increased again to $10.5 million in 2004. These expenses represent the amortization of the costs of producing new business, which consist primarily of agents’ commissions and certain policy issuance and underwriting costs. DAC is amortized over the premium-paying period of the policies in proportion to estimated annual premium revenue for traditional life insurance business. For interest sensitive products, these costs are amortized in relation to the estimated annual gross profits of the policies. The level of policy lapses and surrenders can also have a significant impact on the amount of amortization in any reporting period. The amortization decrease from 2002 to 2003 is primarily due to reductions in credited rates on interest sensitive products which then restored expectations of some future margins allowing reduced amortization. During 2003 this was partially offset by the impact of increased lapses on traditional products which led to increased amortization. The amortization in 2004 is reflective of continued pressure on estimated future margins, due to the low market interest rate environment and its impact on the Company’s interest spread as previously described.

Present value of future profits on acquired businesses (PVFP) is amortized in a similar manner as DAC, as previously described, for traditional and interest sensitive business. Amortization of PVFP totaled $3.2 million, $4.5 million, and $4.2 million for the years ended December 31, 2004, 2003, and 2002, respectively. The amortization is consistent with the run-off of the acquired blocks of business. However, the amount for 2004 included reduced amortization due to assumption changes related to two acquired universal life insurance blocks of business.

Operating expenses for 2004 were $34.2 million, as compared to $41.5 million in 2003 and $34.6 million in 2002. In each year, operating expenses were impacted by several significant and unusual items which are described below.

In 2002, operating expenses included approximately $2.9 million in unusual expenses, including an employment contract buy-out with James M. Grace, a former officer of the Company, a charitable contribution in January 2002 to the Mitte Foundation in the amount of $1 million, the costs of a special investigation, and a charge for uncollectible agent balances.

During 2003, operating expenses included $5.1 million of significant unusual items. These items included:

• $1.6 million paid in investment banking fees for strategic business plan reviews and in legal fees and other expenses for proxy matters and litigation related to the 2003 annual meeting of shareholders.

• $1.1 million for payments to be made to Jeffrey Demgen, Eugene E. Payne and George Wise pursuant to their employment agreements in connection with the termination of their employment by the Company.

• $0.4 million paid to William P. Tedrow in connection with the New Era acquisition in June 2003 (see Registrant’s Quarterly Report on Form 10-Q for the three-month period ended June 30, 2003 for a further description of this payment); and

• $2.0 million of expenses for the estimated loss for the rental and operation of a leased office building through December 2005.

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

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Although many cost reduction steps were implemented in 2004, the savings were largely offset by the extraordinary auditing, actuarial, accounting and other consulting, and legal expenses associated with the reexamination of the Company’s financial accounts and restatement of prior years’ consolidated financial statements. Significant legal fees were also incurred in 2004 related to litigation matters as previously described in Item 3 – Legal Proceedings. A comparison of these expenses for 2004 and prior years is provided below:

	Year Ended December 31,
	2004	2003	2002
	(In thousands)
Audit fees	$       2,967	$       1,482	$          837
Actuarial fees	1,578	763	440
Accounting and other consulting fees	2,762	618	122
Legal fees	1,393	2,254	750
Total	$       8,700	$       5,117	$       2,149

The significant level of these fees has continued into 2005 and 2006 due to the late filing of the Company’s 2003 and 2004 Forms 10-K. Such fees are accrued and reported in the year the services are performed. Subsequent to the filing of the 2003 Form 10-K, the Company began work on its 2004 financial statement reporting requirements. This includes the completion of the 2004 statutory financial statements and related audits for the Company’s insurance subsidiaries and the 2004 consolidated financial statements and related audit as included in this 2004 Form 10-K filing. As this work and the related audits were ultimately completed in 2006, the related fees incurred continue to remain at higher than normal levels. The Company expects such fees to continue at similar levels throughout 2006 at which time the Company anticipates its financial filings will be substantially current and the level of fees may drop to lower levels in 2007. Fees incurred in 2005 and through June 30, 2006, for audit, actuarial, accounting and legal fees totaled approximately $7.3 million and $5.0 million, respectively.

Also to be considered in the analysis of these expenses is that following the filing of the 2003 Form 10-K, the Company engaged Deloitte & Touche LLP as its new independent registered public accounting firm and engaged Allen Bailey & Associates, Inc. as its new actuarial consulting firm. Both firms were also engaged to work on the 2004 and 2005 statutory financial statements for the Company’s insurance subsidiaries, as well as the 2004 and 2005 consolidated financial statements. This change in auditors and actuaries, the first by the Company in many years, required additional work by both internal and external accounting and actuarial personnel.

Operating expenses in 2004 also include a write off of excess of cost over net assets acquired, or goodwill, totaling $752,000 resulting from the Company’s annual impairment analysis of such asset. The goodwill was originally recognized by ILCO in connection with its acquisitions, including Investors Life. The impairment of the entire goodwill asset was triggered by the significant decline in the Company’s stock price from December 31, 2003 to December 31, 2004. The Company’s stock price is a significant component in the valuation calculation as required in the impairment analysis.

Interest expense for 2004 and 2003 totaled $864,000 and $485,000, respectively. As previously disclosed in this Item 7, the interest expense relates to debt service on $15 million the Company borrowed in 2003 through issuance of trust preferred notes (the “2003 Notes”). The 2003 Notes bear interest quarterly at the three-month LIBOR rate plus 4.2%. Interest expense for 2004 and 2003 reflects an average annual interest rate of approximately 5.8% and 5.3 %, respectively.

Taxes

The provision for federal income taxes on loss from continuing operations, before cumulative effect of change in accounting principles, reflects tax benefits totaling $2.2 million, $3.5 million and $3.5 million for the years 2004, 2003 and 2002. These tax amounts equate to effective tax benefit rates of (13.1%), (16.8%), and (28.1%) for the years ended December 31, 2004, 2003, and 2002, respectively. The primary reason for the significant deviation from the expected statutory tax rate of 34% for the Company is due to the establishment of a valuation allowance and increases to this allowance for deferred tax assets. Under SFAS No. 109, the Company has established a valuation allowance when, based on the weight of the available evidence, it is more likely than not that some portion of its deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon the Company’s generation of sufficient taxable income in the future to recover tax benefits that cannot be recovered from taxes paid in prior periods. The Company’s deferred tax assets are primarily comprised of net operating losses of FIC and its non-life insurance wholly owned subsidiaries. These non-life net operating loss carry forwards totaled

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approximately $34.6 million at year-end 2004 and begin to expire in 2008 through 2024. The valuation allowance totaled $9.8 million at December 31, 2004, with the initial establishment of the allowance in 2002 totaling $0.8 million. Additions to the allowance totaled $3.0 million and $6.0 million in 2004 and 2003, respectively. The additions in 2004 include $3.3 million related to continuing operations and a reduction of $0.3 million related to other comprehensive income. The 2003 additions include $3.6 million related to continuing operations, $2.1 million related to discontinued operations, and $0.3 million related to other comprehensive income.

Liquidity and Capital Resources

Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations. FIC is an insurance holding company whose principal assets at and for the year ended December 31, 2004, consisted of its ownership interests in its insurance subsidiaries, Family Life Insurance Company and Investors Life Insurance Company. As a holding company, FIC’s ability to pay interest and principal on its debt, pay its expenses and pay dividends on its common stock depend substantially on its receipt of dividends or other cash flow from its subsidiaries.

At the holding company level, FIC’s principal current ongoing liquidity demands relate to the payment of principal and interest on its indebtedness. As of December 31, 2004, Investors Life held $15.4 million of notes receivable from FIC (the “Affiliated Notes”) that represented the remaining indebtedness related to the Family Life acquisition. Although this intercompany indebtedness is eliminated on FIC’s consolidated balance sheets, it creates a debt service requirement at the holding company level. The Affiliated Notes, through June, 2004, included the following provisions:

(a) principal payments each quarter of $1,536,927; and

(b) interest payments each quarter, at an annual rate of 9.0%. 

In June 2004, with the approval of the Texas Department of Insurance, the Affiliated Notes were amended to provide for:

(a) no principal payments until March 12, 2006;

(b) principal payments each quarter of $1,536,927, commencing March 12, 2006, and ending with a final payment on June 12, 2008; and

(c) interest payments each quarter, at an annual rate of 5.0%.

Again with the approval of the Texas Department of Insurance, the loans were restructured as of March 9, 2006. As amended, the loans provide for a one year moratorium on principal payments for the period from March 12, 2006, to December 12, 2006, with principal payments to resume on March 12, 2007, with ten equal quarterly principal payments until the maturity date of June 12, 2009. These notes have been eliminated in consolidation.

The holding company’s other principal liquidity requirement is debt service on the $15 million of 2003 Notes that it issued in May 2003. (See “Financial Condition – Liabilities” earlier in this Item 7.) These notes require quarterly interest payments at a variable interest rate of the three-month LIBOR rate plus 4.2% (which yielded a rate of approximately 9.02% at April 1, 2006). The principal amount of the 2003 Notes must be repaid in a single payment in 2033.

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

Since FIC is not current in its filing of financial information with the SEC it does not have access to the public capital markets. Although FIC does not believe that it will need additional capital to fund its obligations through 2006, the unavailability of access to the public capital markets may adversely affect our ability to grow our business through acquisitions.

The ability of Family Life and Investors Life to pay dividends to FIC and meet these holding-company liquidity demands is subject to restrictions set forth in the insurance laws and regulations of Texas, its domiciliary state. Texas limits how and when Family Life and Investors Life can pay such dividends by (a) including the “greater of” standard for payment of dividends to shareholders and (b) requiring that prior notification of a proposed dividend be given to the Texas Department of Insurance. Under the “greater of” standard, an insurer may pay a dividend in an amount equal to the greater of: (i) 10% of the policyholder surplus or (ii) the insurer’s statutory net gain from operations for the previous year.

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In June 2004, FIC, with the approval of the Texas Department of Insurance, created FIC Insurance Services, L.P., a service company subsidiary, and transferred to it many of the administrative functions of the insurance companies. The new service company charges each insurance company a monthly service fee that is calculated using a formula based on policies under management, new policies issued, managed assets, and other factors. Profits earned by the service company are paid as dividends to the holding company, providing an additional source of liquidity at the holding company level.

Liquidity considerations at FIC’s insurance subsidiaries are different in nature than for the holding company. Sources of cash for FIC’s insurance subsidiaries consist of premium payments and deposits from policyholders and annuity holders, charges on policies and contracts, investment income, and proceeds from the sale of investment assets. These funds are applied primarily to provide for the payment of claims under insurance and annuity policies, payment of policy withdrawals, surrenders and loans, operating expenses, taxes, investments in portfolio securities, and shareholder dividends.

A primary liquidity consideration with respect to life insurance and annuity products is the risk of early policyholder and contractholder withdrawal. Deposit fund liabilities for universal life and annuity products as of December 31, 2004, were $572.1 million, compared to $593.9 million at December 31, 2003. Individual life insurance policies are less susceptible to withdrawal than are annuity contracts because life insurance policyholders may incur surrender charges and undergo a new underwriting process in order to obtain a new insurance policy. At December 31, 2004, the bulk of the liabilities for contractholder deposit funds on FIC’s balance sheet, $398 million, represented insurance products, as compared to only $174 million of annuity product liabilities.

Since each insurance company holds large portfolios of highly liquid publicly traded debt securities, raising cash through asset sales is available should other sources of liquidity fail to provide cash as needed. In this regard, however, the insurance companies must be concerned about such sales at inopportune times, when adverse movements in interest rates may have depressed the market price of securities so that sales would result in the realization of significant losses. To guard against such an outcome, FIC’s management monitors benefits paid and surrenders of insurance products to provide projections of future cash requirements. Also as part of this monitoring process, FIC performs cash flow testing of assets and liabilities at each year-end to evaluate the match between the planned maturities of the insurance company assets and the likely liquidity needs of the companies over time. Such cash-flow testing, prescribed by insurance laws and regulations, models the likely performance of assets and liabilities over time, using a wide variety of future interest rate scenarios.

There can be no assurance that future experience regarding benefits and surrenders will be similar to the historic experience on which such cash-flow testing is based, since withdrawal and surrender levels are influenced by such factors as the interest-rate environment and general economic conditions as well as the claims-paying and financial strength ratings of FIC’s insurance subsidiaries.

In connection with sales of invested assets, on June 1, 2005, the Company sold its River Place Pointe office complex to a non-affiliated party in an all-cash transaction for a gross purchase price of $103 million. Under the terms of the sale agreement, the Company entered into a lease with the purchaser with respect to all of the space in Building One for a five-year term.  The Company will realize a gain of $10.1 million on the sale, which includes both a current 2005 realized gain of $8.0 million and a deferred gain of $2.1 million to be recognized over the period from the sale date through March 31, 2008.  Although this results in lower real estate income, the Company is able to reinvest these proceeds into more liquid investments, more closely related to the cash flow needs of its policyholder-related liabilities.

Contractual Obligations

The following table summarizes information regarding FIC’s contractual obligations, including principal and interest where applicable, as of December 31, 2004. The amounts in the table are different than those reported in our consolidated balance sheet as of December 31, 2004 due to the consideration of interest on debt obligations. Some of the amounts included in this table are based on management’s estimates and assumptions about these obligations, including those related to duration, future mortality, and persistency. Because these estimates and assumptions are necessarily subjective, the amounts actually paid by the Company in the future may vary significantly due to the uncertainty of the timing of cash flows based on insurable events or policyholder surrenders.

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				Less than	One to	Four to	More than
Contractual Obligations			Total	one year	three years	five years	five years
			(in millions)
Long-term debt obligations (1)			$      58.3	$        1.1	$        3.0	$        3.1	$      51.1
Operating lease obligations			1.2	1.0	0.2	-	-
Other long-term liabilities reflected
	on the consolidated balance sheet:
		Policy liabilities (2)	2,090.1	108.3	208.7	199.6	1,573.5
		Other policy claims and benefits (3)	12.9	12.9	-	-	-
Total			$ 2,162.5	$    123.3	$    211.9	$    202.7	$ 1,624.6

⁽¹⁾ Long-term debt obligations represent notes payable totaling $15 million due 2033.  Amounts differ from balances presented on the consolidated balance sheets due to the inclusion of projected interest to be paid at the variable interest rate of the three-month LIBOR rate plus 4.2%.

   

⁽²⁾ Policy liabilities represent estimated cash payments to be made to policyholders. Such cash outflows reflect adjustments for the estimated timing of mortality, morbidity, persistency, and other appropriate factors but are undiscounted with respect to interest.  The liability amount in the consolidated financial statements reflects the discounting for interest, as well as the timing for other factors described above.

   

⁽³⁾ Other policy claims and benefits represent benefit and claim liabilities for which the Company believes the amount and timing of the payment is essentially fixed and determinable.  Such amounts generally relate to 1) policies or contracts where the Company is currently making payment and will continue to do so until the occurrence of a specific event and 2) incurred and reported claims.

Liquidity Experience

FIC’s overall liquidity experience in recent periods is reflected in its consolidated statements of cash flows, the highlights of which are summarized in the following table.

	Year Ended December 31,
		2003	2002
	2004	Restated	Restated
	(In millions)
Cash and cash equivalents at beginning of year	$        82.4	$      163.1	$        97.7
Net cash provided by operating activities	5.5	5.8	10.5
Net cash provided by (used in) investing activities	(4.7)	(97.2)	68.7
Net cash provided by (used in) financing activities	(31.2)	10.8	(13.8)
Net increase (decrease) in cash	(30.4)	(80.7)	65.4
Cash and cash equivalents at end of year	$        52.0	$        82.4	$      163.1

The decrease of $30.4 million in cash and cash equivalents during 2004 was primarily due to purchase of investments and cash used in financing activities to fund net cash outflows from contractholder deposits. The decrease of $80.7 million in cash and cash equivalents from 2002 to 2003 was largely due to purchases of long-term fixed maturity securities.

Net cash provided by operating activities totaled $5.5 million, $5.8 million, and $10.5 million for the years ended December 31, 2004, 2003, and 2002, respectively. The slight decrease in cash from operating activities in 2004 was significantly impacted by lower operating expenses as well as cash flow from the Company's trading securities. However, these positive cash flows were offset by lower premiums on traditional insurance products and lower net investment income. The decrease of $4.7 million in cash provided by operating activities in 2003 compared to 2002 was primarily attributable to a decrease in premium income and an increase in operating expenses.

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Net cash used in investing activities in 2003 was primarily attributable to increased investment purchases. At December 31, 2002, the Company had holdings of short-term investments of $101,000 and cash and cash equivalents of $163.0 million for a combined total of $163.1 million. During 2003 the Company utilized $80.7 million of these funds primarily to purchase longer term fixed maturity securities. The remaining $82.4 million was held as cash and cash equivalents at December 31, 2003, and the Company had no short-term investments at year-end 2003.

Also as previously described in this Item 7, during late 2003 and early 2004, the Company completed a realignment strategy of its investment portfolio. As of December 31, 2003, the Company’s combined cash, cash equivalents, and short-term investments totaled $82.4 million. With the low interest rate environment during 2004, the Company increased this level to $114.6 million at December 31, 2004 ($52.0 million in cash and cash equivalents and $62.5 million in short-term investments), in anticipation of an improved interest rate environment. It was also during this time that Conning and the Company completed more extensive asset/liability management and duration analysis which provided the information for more effective reinvestment of funds. As market interest rates began to rise subsequent to 2004, most of the cash and short-term investments were deployed in longer term fixed maturity securities during 2005 and the first quarter of 2006.

Net cash used in financing activities totaled $31.2 million and $13.8 million in 2004 and 2002, respectively, while 2003 reflected net cash provided by financing activities of $10.8 million. The most significant components of the Company's financing activities are contractholder fund deposits and withdrawals for annuity and universal life insurance policies. For 2004, 2003, and 2002, contractholder fund withdrawals exceeded deposits by $31.2 million, $4.7 million, and $12.3 million, respectively. The significant change in net withdrawals in 2004 is due to a decline in deposits in 2004 from 2003 of $18.2 million and an increase in withdrawals of $8.3 million for the same period. The net withdrawals in 2003 were more than offset by funds provided by the $15.0 million notes issued in May 2003.

The decrease in contractholder fund deposits in 2004 from prior years is largely due to the Company’s decision in 2004 to temporarily discontinue the sale of fixed annuity products, as previously described. Certain design features of the Company’s annuity products, coupled with competition in the annuity market and a low interest rate market environment led to this decision. Total contractholder fund deposits for 2004, 2003, and 2002 totaled $39.3 million, $57.5 million, and $55.3 million, respectively.

Contractholder fund withdrawals are a normal part of the run-off of any company's existing book of business. The increase in withdrawals in 2004 could be impacted by the low market interest rate environment and the Company's lowering of credited interest rates on certain annuity and universal life insurance products in response to lower investment rates. Total contractholder fund withdrawals for 2004, 2003, and 2002 totaled $70.5 million, $62.2 million, and $67.7 million, respectively.

Liquidity management is designed to ensure that adequate funds are available to meet all current and future financial obligations. The Company meets its liquidity requirements primarily by positive cash flows from the operations of subsidiaries, and to a lesser extent, cash flows provided by investing activities. Proper liquidity management is crucial to preserve stable, reliable, and cost-effective sources of cash to meet the future benefit payments under our various insurance and deposit contracts, pay operating expenses (including interest and income taxes), and maintain reserve requirements. In this process, we focus on our assets and liabilities, and the impact of changes in both short-term and long-term interest rates, market liquidity and other factors. We believe we have the ability to generate adequate cash flows for operations on a short-term and a long-term basis.

Critical Accounting Policies and Estimates

The accounting policies below have been identified as critical to the understanding of the results of operations and financial position. The application of these critical accounting policies in preparing the financial statements requires management to use significant judgments and estimates concerning future results or other developments, including the likelihood, timing or amount of one or more future transactions. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, estimates, assumptions and judgments are evaluated based on historical experience and various other information believed to be reasonable under the circumstances. For a detailed discussion of other significant accounting policies, see Note 1 – Organization and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.

Accounting for Premiums on Universal Life Policies and for Annuity Deposits

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In accordance with accounting principles generally accepted in the United States of America (“GAAP”), universal life insurance premiums and annuity deposits received are reflected in FIC’s consolidated financial statements as increases in liabilities for contractholder deposit funds and not as revenues. Instead revenues from such contracts consist of amounts assessed against policyholder account balances for mortality, policy administration and surrender charges, and are recognized in the period in which the benefits and services are provided. Similarly, surrender benefits paid relating to universal life insurance policies and annuities are reflected as decreases in liabilities for contractholder deposit funds and not as expenses.

Investments

The Company’s principal investments are in fixed maturity securities and real estate; all of which are exposed to three primary sources of investment risk: credit, interest rate and liquidity. The fixed maturity securities, which are all classified as available for sale, are carried at their fair value in the Company’s balance sheet, with unrealized gains or losses recorded in accumulated other comprehensive income. The investment portfolio is monitored regularly to ensure that investments which may be other than temporarily impaired are identified in a timely fashion and properly valued, and that impairments are charged against earnings as realized investment losses. The valuation of the investment portfolio involves a variety of assumptions and estimates, especially for investments that are not actively traded. Fair values are obtained from a variety of external sources. The Company has a policy and process in place to identify securities that could potentially have an impairment that is other-than-temporary. This process involves monitoring market events that could impact issuers’ credit ratings, business climate, management changes, litigation and government actions, and other similar factors. This process also involves monitoring late payments, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues. At the end of each quarter, all securities are reviewed where fair value is less than ninety percent of amortized cost for six months or more to determine whether impairments should be recorded. The analysis focuses on each issuer’s ability to service its debts and the length of time the security has been trading below cost. This quarterly process includes an assessment of the credit quality of each investment in the entire securities portfolio. The Company considers relevant facts and circumstances in evaluating whether the impairment of a security is other-than-temporary. Relevant facts and circumstances considered include (1) the length of time the fair value has been below cost, (2) the financial position of the issuer, including the current and future impact of any specific events, and (3) the Company’s ability and intent to hold the security to maturity or until it recovers in value. To the extent the Company determines that a security is deemed to be other than temporarily impaired, the difference between amortized cost and fair value would be charged to income as a realized investment loss. There are a number of significant risks and uncertainties inherent in the process of monitoring impairments and determining if an impairment is other-than-temporary. These risks and uncertainties include (1) the risk that the Company’s assessment of an issuer’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics of that issuer, (2) the risk that the economic outlook will be worse than expected or have more of an impact on the issuer than anticipated, (3) the risk that fraudulent information could be provided to the Company’s investment professionals who determine the fair value estimates and other-than-temporary impairments, and (4) the risk that new information obtained by the Company or changes in other facts and circumstances lead the Company to change its intent to hold the security to maturity or until it recovers in value. Any of these situations could result in a charge to income in a future period.

Real Estate

The Company monitors the performance of its real estate properties on an ongoing basis and identifies properties it intends to hold for investment and properties it intends to sell. Properties held for investment are classified as invested real estate and are stated at cost less accumulated depreciation. Depreciation is provided using straight-line methods over estimated useful lives of 5 to 40 years, or for leasehold improvements the minimum lease term if shorter. Real estate income is reported net of expenses incurred to operate the properties and depreciation expenses. The Company reviews its invested real estate properties on an on-going basis for impairment using a probability-weighted estimation of the expected net undiscounted future cash flows. If the expected net undiscounted future cash flows are less than the net book value of the property, the excess of the net book value over the Company’s estimate of fair value of the asset is recognized as a realized loss in the consolidated statement of operations and the new cost basis is depreciated over the property’s remaining life.

Properties that are identified for sale and actively marketed by the Company are classified as real estate held for sale and are stated at the lower of cost less accumulated depreciation or net realizable value. No depreciation is recorded while the property is classified as held for sale. Net realizable value is determined by the Company based on the estimated selling price less direct costs of the sale.

Deferred Policy Acquisition Costs and Present Value of Future Profits of Acquired Business

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The costs of acquiring new business, including certain costs of issuing policies and certain other variable selling expenses (principally commissions), are included in deferred policy acquisition costs (“DAC”). DAC is capitalized and then amortized to reflect an appropriate expense in relation to the projected stream of profits (for universal life and annuity products) or to the premium revenue stream (for traditional life products). Similarly, when existing blocks of business are acquired, an intangible capital asset (termed “present value of future profits of acquired business” or “PVFP”) reflecting the costs of acquiring the business is created and then amortized over what is judged to be an appropriate term relative to the expected revenues and profitability of the block.

Projections used to determine the rate of amortization of DAC and PVFP also require extensive assumptions about, among other things, interest margins, product loads, mortality rates, persistency rates, and maintenance expense levels. In setting the levels of DAC and PVFP amortization, important assumptions must also be made about the appropriate level at which blocks of policies will be aggregated for testing the acceptability of amortization schedules, and views vary widely on this topic. These assumptions involve judgment and are compared to actual experience on an ongoing basis. Significant changes in these assumptions can impact the carrying balance of DAC and PVFP and produce changes that must be reflected in the current period’s income as an unlocking adjustment. Loss recognition is evaluated periodically on an aggregate basis that combines deferred policy acquisition costs with the present value of future profits on acquired business.

Future Policy Benefits

FIC’s liability for future policy benefits accounted for 13.9% of its total liabilities at December 31, 2004, or 20.2% after excluding liabilities associated with separate accounts. These liabilities for future policy benefits, referred to as reserves, are estimated using actuarial methods based on assumptions about future receipts of premiums, interest yields, investment returns, expenses, mortality, morbidity, and persistency. These assumptions consider Company experience and industry standards. The assumptions vary by plan, age at issue, year of issue, and duration. They include estimates, shaped by judgment and experience, and have a substantial impact on the reported financial condition of the Company. Differences between actual experience and assumptions used in the pricing of these policies and in the establishment of liabilities may result in variability of net income in amounts which may be material.

Deferred Taxes

The Company computes deferred income taxes utilizing the asset and liability method. Under this method, balance sheet amounts for deferred income taxes are computed based on the tax effect of the differences between the financial reporting and federal income tax bases of assets and liabilities using the tax rates which are expected to be in effect when these differences are anticipated to reverse. Deferred income tax assets are subject to ongoing evaluation of whether such assets will be realized. Realization of deferred tax assets is dependent upon the Company's generation of sufficient taxable income in the future to recover tax benefits that cannot be recovered from taxes paid in prior periods. If future taxable income is not expected, the Company establishes a valuation allowance, when based on the weight of the available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized.

For a further discussion of accounting policies, see Note 1 to the accompanying consolidated financial statements.

New Accounting Pronouncements

The following pronouncements have been identified as those which could have a material effect on the consolidated financial statements of the Company.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS 123(R) is a revision of SFAS 123, “Accounting for Stock-Based Compensation,” which was originally issued by the FASB in 1995. As originally issued, SFAS 123 provided companies with the option to either record expense for share-based payments under a fair value model, or to simply disclose the impact of the expense. SFAS 123(R) requires companies to measure the cost of share-based payments to employees using a fair value model, and to recognize that cost over the relevant service period. In addition, SFAS 123(R) requires that an estimate of future award forfeitures be made at the grant date, while SFAS 123 permitted recognition of forfeitures on an as incurred basis. This statement is effective for all awards granted, modified, repurchased, or cancelled after June 15, 2005, and, as a result, the Company will adopt SFAS 123(R) beginning January 1, 2006. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial statements.

In July 2003, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 03-01, “Accounting and Reporting by Insurance Enterprises for

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Certain Non-traditional Long-Duration Contracts and for Separate Accounts.” AcSEC developed the SOP to address the evolution of product designs since the issuance of SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” and 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” and the need for interpretive guidance to be developed in three areas: separate account presentation and valuation; the accounting recognition given sales inducements (bonus interest, bonus credits, persistency bonuses); and the classification and valuation of certain long-duration contract liabilities.

The Company adopted the provisions of SOP 03-01 at January 1, 2004, resulting in an increase to income as a cumulative effect of a change in accounting principle totaling $229,000, net of taxes, as reflected in the accompanying 2004 consolidated statement of operations. The Company has certain universal life insurance products that are credited with bonus interest after applicable qualifying periods. The adoption of the new accounting principle changed the pattern of recognition of the bonus interest expense.

In May 2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections – A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” This Statement changes the requirements for the accounting for and reporting of a change in accounting principle. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable.

This Statement also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS No. 154 carries forward without change the guidance contained in APB Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. This statement is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005, with earlier adoption permitted. As a result, and due to the restatement included within the accompanying 2003 and 2002 consolidated financial statements, the Company adopted SFAS No. 154 for the correction of errors reported after December 31, 2005.

In September 2005, the American Institute of Certified Public Accountants (“AICPA”), issued Statement of Position (“SOP”) 05-01, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.” The SOP 05-01 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards (“SFAS”) 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and For Realized Gains and Losses from the Sale of Investments.” The SOP 05-01 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. The SOP 05-01 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company has not completed an assessment of the estimated impact of SOP 05-01 on its consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”). 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, treatment of interest and penalties, and disclosure of such positions. FIN 48 will be applied prospectively and will be effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 and does not expect adoption to have a material impact on the Company’s consolidated financial statements.

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)”.  Under this new standard, companies must recognize a net liability or asset to report the funded status of their defined benefit pension and other postretirement

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benefit plans on their balance sheets.  The effective date of the recognition and disclosure provisions for calendar-year public companies is for calendar years ending after December 15, 2006.  The Company is currently evaluating the impact of this new standard but it is not expected to have a significant effect on the consolidated financial statements for the year ending December 31, 2006.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General

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

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

The primary market risk to the Company’s investment portfolio is interest-rate risk. The Company does not use derivative financial instruments.

Interest-Rate-Risk

The Company manages the interest-rate risk inherent in its fixed income assets relative to the interest-rate risk inherent in its liabilities. Generally, we manage interest-rate risk based on the application of a commonly used model. The model projects the impact of interest rate changes on a range of factors, including duration and potential prepayment. For example, assuming an immediate increase of 100 basis points in interest rates, the net hypothetical loss in fair market value related to the financial instruments segment of the Company’s consolidated balance sheet is estimated to be $28.1 million at December 31, 2004, and $38.4 million at December 31, 2003. For purposes of the foregoing estimate, fixed maturities, trading securities, and short-term investments were taken into account. The fair value of such assets was $500.2 million at December 31, 2004, and $560.7 million at December 31, 2003.

The fixed income investments of the Company include certain mortgage-backed securities (excluding asset-backed securities) and trading securities. The fair value of such securities was $179.1 million at December 31, 2004, and $263.4 million at December 31, 2003. Assuming an immediate increase of 100 basis points in interest rates, the net hypothetical loss in the fair value related to such mortgage-backed securities is estimated to be $14.1 million at December 31, 2004, and $19.1 million at December 31, 2003.

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

The Company does not use derivative financial instruments to manage its exposure to fluctuations in interest rates.

ITEM 8.  FINANICAL STATEMENTS AND SUPPLEMENTARY DATA

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

1. Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, dated October 27, 2006.

2. Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, dated July 29, 2005, except for the current period restatement described in Note 2 as to which the date is October 19, 2006.

3. Consolidated Balance Sheets as of December 31, 2004 and 2003 (Restated).

4. Consolidated Statements of Operations for the years ended December 31, 2004, 2003 (Restated), and 2002 (Restated).

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5. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2004, 2003 (Restated), and 2002 (Restated).

6. Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 (Restated), and 2002 (Restated).

7. Notes to Consolidated Financial Statements, as Restated.

8. Consolidated Financial Statement Schedules, as Restated.

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

On September 8, 2005, the Audit Committee of the Board of Directors of the Company approved the appointment of Deloitte & Touche LLP (“Deloitte”) as its new independent registered public accounting firm for the year ended December 31, 2004. Also, on September 8, 2005, the Audit Committee dismissed PricewaterhouseCoopers LLP (“PwC”) as the Company’s independent registered public accounting firm, subject to completion of its procedures on the financial statements of the Company’s three non-public employee benefit plans as of and for the year ended December 31, 2003. On January 27, 2006, PwC completed its audit procedures on the financial statements of the Company’s three non-public employee benefit plans as of and for the year ended December 31, 2003.

PwC’s reports on the Company’s consolidated financial statements for each of the years ended December 31, 2003 and 2002 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principle.

During the years ended December 31, 2003 and 2002, and through September 8, 2005, there have been no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of PwC, would have caused PwC to make reference thereto in their reports on the consolidated financial statements of the Company for such years.

During the years ended December 31, 2003 and 2002, and through September 8, 2005, there have been no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K) other than as noted in the balance of this paragraph. In its Form 10-K for the year ended December 31, 2003, which was filed with the SEC on July 29, 2005, the Company disclosed that, in the course of completing its consolidated financial statements as of and for the year ended December 31, 2003, management identified a significant number of internal control weaknesses in several key areas that had resulted in material misstatement of financial results. These included weaknesses in the following areas among others: deferred policy acquisition costs; present value of future profits of acquired businesses; policy liabilities; investment accounting; consolidation process; purchase accounting; financial reporting procedures and review process; and intercompany accounting. As a result of this review, and in consultation with PwC, the Company restated its audited consolidated financial statements for the years ended December 31, 2002 and 2001. PwC has advised the Company that the material weaknesses in internal controls contributed to the restatement of the Company’s financial statements for the years ended December 31, 2002 and 2001. Remediation efforts regarding such material weaknesses are described in Item 9A of the Company’s Form 10-K for the year ended December 31, 2003.

The Company provided PwC with a copy of the Form 8-K filed with regard to the change in independent accountant, which was filed with the SEC on September 14, 2005, and requested that PwC furnish the Company with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the foregoing statements. A copy of PwC’s letter dated September 14, 2005, was filed as Exhibit 16.1 to the September 14, 2005, Form 8-K.

During the years ended December 31, 2003 and 2002, and the subsequent interim period through September 8, 2005, the Company did not consult with Deloitte regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

As disclosed in detail in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 2 in the accompanying consolidated financial statements, the Company has restated its consolidated financial statements for the years 2003, 2002, 2001 and 2000, that were previously reported in its Annual Report on Form 10-K for the year ended December 31, 2003. PwC has also advised the Company that material weaknesses in internal controls as of December 31, 2003, contributed to the subsequent restatement of the Company’s consolidated financial statements for the years ended December 31, 2003 and 2002 included in this Form 10-K. The Company’s prior independent registered public accounting firm, PwC, was retained to conduct the audit and reviews of the quarterly consolidated financial statements related to this restatement. 

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ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this report. Disclosure controls include controls designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company’s management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. Our Interim Chief Executive Officer and Chief Financial Officer supervised and participated in the evaluation. Based on the evaluation, our Interim Chief Executive Officer and Chief Financial Officer each concluded that, as of the end of the period covered by this report, due to the material weaknesses in our internal control over financial reporting described below, our disclosure controls and procedures were not effective.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is designed 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. Our internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made in accordance with authorizations of our management and directors; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 2), or combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned functions.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004, using the criteria established in Internal Control — Integrated Framework issued by the Commission of Sponsoring Organizations of the Treadway Commission (“COSO”), and concluded that we did not maintain effective internal control over financial reporting.

While the Company has reached its conclusion that it did not have effective internal control over financial reporting, the Company considers its assessment to be incomplete due to many instances where it was unable to prove that internal controls were effective due to the lack of sufficient evidence of the controls performed. Although the Company’s assessment is considered to be incomplete, the Company has identified the following material weaknesses of internal control over financial reporting:

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Control Environment: The Company’s control environment did not sufficiently promote effective internal control over financial reporting throughout its financial management organization and this material weakness contributed to the development of other material weaknesses described below. Principal contributing factors include:

• The lack of sufficient competent accounting personnel in key financial reporting positions.

• The lack of formalized policies and procedures in all areas across the Company.

• The lack of an anti-fraud program.

• Ineffective communication of and education on the control framework, management’s expectations for controls, and business process owners' accountability for controls.

• The lack of accountability for ensuring that key internal controls are adequately designed and operating effectively.

• The use of personnel without the appropriate internal control backgrounds and experience to manage and conduct the Company’s internal control readiness procedures, including planning, documentation, and testing.

• Inadequate and incomplete documentation and testing of key controls of all business processes across the Company.

• The Company could not sufficiently evidence the performance of many of its internal control activities across the organization including controls over management’s assertions with regard to the validity, completeness, timeliness, cutoff and accuracy of calculations and transactions.

• Unclear lines of authority and responsibility between the Board of Directors and management.

These deficiencies represented design deficiencies in internal control and in the aggregate resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constitute a material weakness.

Risk Assessment: The Company did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud related risks and the risks related to non-routine transactions, if any, on its internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

Control Monitoring: The Company had not established adequate systems for monitoring the adequacy of controls to include:

• A sustainable process for periodically evaluating control design and operating effectiveness across the Company on an ongoing basis.

• An internal audit function to review financial reporting, compliance and operational controls and activities, review adequacy of remediation for known deficiencies, and provide guidance to the Company on significant control or accounting issues.

These deficiencies represented a design deficiency in internal controls which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

Financial Close and Reporting: The Company's processes for preparing the consolidated financial statements were not clearly defined and they lack appropriate controls to ensure the completeness, accuracy, timeliness, appropriate valuation, and proper presentation and disclosure of financial transactions. The Company did not evidence reviews, approvals, and reconciliations of both routine and non-routine accounting transactions with regard to the following financial processes: expenditures, fixed assets, income taxes, financial close and reporting, and agent compensation.

This lack of financial reporting controls has resulted in the late filing of required interim and annual financial information, restatements of prior years consolidated financial statements, and a significant number of errors identified during the course of the audit of the 2004 consolidated financial statements. As a result of these errors, the Company has restated its previously issued consolidated financial statements to correct prior period errors which were related to the following balance sheet accounts, as described in Note 2 to the consolidated financial statements:

• Policy loans,

• Cash and cash equivalents,

• Deferred policy acquisition costs,

• Present value of future profits of acquired businesses,

• Agency advances and other receivables,

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• Accrued investment income,

• Other liabilities, and

• Current and deferred federal income taxes related to these errors.

These deficiencies represented a design deficiency in internal controls and based on misstatements requiring correction in the financial statements, they constituted a material weakness.

Segregation of Duties: The Company did not segregate incompatible accounting functions of individuals responsible for several business processes, including:

Expenditures:

• The accounts payable clerk could add new vendors, approve new vendors, enter check transactions into the general ledger, and review and approve pending payment transactions. 

Policy Liabilities:

• The chief actuary had the ability to adjust policy reserve calculations without being subject to any additional reviews or monitoring.

Financial Close and Reporting:

• Senior level accounting personnel could both create and approve journal entries.

Reinsurance:

• The same person who is responsible for monitoring delinquent reinsurance receivables receives the payments from reinsurers.

• The reinsurance reporting analyst had the authority to make payment requests and approve payments.

Human Resources:

• The human resource benefits coordinator had the ability to view, modify, and transfer payroll master file information without approval.

In the aggregate, these deficiencies in the design of internal controls result in more than a remote likelihood that a material error would not have been prevented or detected, and constitute a material weakness.

Reconciliations: The Company had not appropriately documented, approved, or completed timely reconciliations in several key areas including:

• Transactions related to the Company’s separate accounts,

• Premium transactions,

• Policy information processed by the Company’s Policyholder Services Division,

• Payroll transactions, and

• Agent compensation.  

These deficiencies represented a design deficiency in internal controls which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

Use of Third Party Service Providers: The Company extensively utilized third party service providers for the processing of payroll, computation of actuarial reserves, calculation of income tax balances, and the processing of separate account transactions. The Company did not have adequate controls in place to ensure completeness and accuracy of neither transactions processed nor calculations produced by these third party service providers. These deficiencies represented a design deficiency in internal controls which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

Safeguarding of Assets:The Company did not have appropriate controls in place to adequately safeguard assets including:

• Fixed asset acquisition, tracking, and disposition, and

• Procurement of only authorized goods and services

These deficiencies represented a design deficiency in internal controls which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

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Reinsurance: The Company did not maintain effective controls to ensure that all policies that are subject to reinsurance were properly accounted for and ceded to the Company’s reinsurers. The Company did not have a process to adequately reconcile the in-force policy data maintained on its policy administration systems to the reinsurance settlement statements. As a result of these control deficiencies, there were many instances that occurred whereby the Company did not properly record reinsurance transactions in an accurate and timely manner. As a result, the Company recorded restatement adjustments to appropriately cede premiums and reduce reinsurance receivables as described in Note 2 to the consolidated financial statements. These deficiencies represented a design deficiency in internal controls and based on misstatements requiring correction in the financial statements, they constituted a material weakness.

Policy Data Integrity: The Company utilized multiple policy administrative systems, including both automated and manual systems, to process and account for policy related transactions associated with the various types of insurance business issued and administered by the Company. These systems were not common in nature and ranged from full functioning mainframe-based insurance administrative systems to basic spreadsheet and database systems, as well as manual systems. The Company did not have adequate controls with regard to the management of policy data maintained on these systems. There were not adequate controls with regard to the processing of policy transactions on both manual and automated administration systems, including the transfer of data between systems. Additionally, there were not adequate controls with regard to the review of policy transaction data and the identification and correction of pro cessing errors. This lack of policy data integrity controls resulted in material errors, particularly in the calculation of the Company's policy benefit reserve balances. These errors were a result of the actuarial reserve estimates being based on inaccurate and incomplete policy data. Additionally, these control deficiencies have resulted in errors in other financial statement account balances, including policy loans and policyholder benefits. As a result, the Company restated its previously issued consolidated financial statements to correct prior period errors as described in Note 2 to the consolidated financial statements.

These deficiencies represented a design deficiency in internal controls and based on misstatements requiring correction in the financial statements, they constituted a material weakness.

We engaged our independent registered public accountant, Deloitte & Touche LLP (“Deloitte”), to audit management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 and they have issued their report which appears below. However, due to the fact that management had not completed the testing of our internal control over financial reporting, Deloitte is unable to render an opinion on our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004. Because of management’s inability to complete our testing and Deloitte’s inability to complete their audit, material weaknesses in addition to those described above might have existed at December 31, 2004, which have not been identified.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Financial Industries Corporation

Austin, Texas

We were engaged to audit management’s assessment regarding the effectiveness of internal control over financial reporting of Financial Industries Corporation and subsidiaries (the “Company”) as of December 31, 2004. 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.

As described in the accompanying Management’s Report on Internal Control Over Financial Reporting, the Company was unable to complete its assessment of the effectiveness of the Company’s internal control over financial reporting. Accordingly, we are unable to perform auditing procedures necessary to form an opinion on management’s assessment.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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. 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 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment:

Control Environment: The Company’s control environment did not sufficiently promote effective internal control over financial reporting throughout its financial management organization and this material weakness contributed to the development of other material weaknesses described below. Principal contributing factors include:

• The lack of sufficient competent accounting personnel in key financial reporting positions.

• The lack of formalized policies and procedures in all areas across the Company.

• The lack of an anti-fraud program.

• Ineffective communication of and education on the control framework, management’s expectations for controls, and business process owners' accountability for controls.

• The lack of accountability for ensuring that key internal controls are adequately designed and operating effectively.

• The use of personnel without the appropriate internal control backgrounds and experience to manage and conduct the Company’s internal control readiness procedures, including planning, documentation, and testing.

• Inadequate and incomplete documentation and testing of key controls of all business processes across the Company.

• The Company could not sufficiently evidence the performance of many of its internal control activities across the organization including controls over management’s assertions with regard to the validity, completeness, timeliness, cutoff and accuracy of calculations and transactions.

• Unclear lines of authority and responsibility between the Board of Directors and management.

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These deficiencies represented design deficiencies in internal control and in the aggregate resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constitute a material weakness.

Risk Assessment: The Company did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud related risks and the risks related to non-routine transactions, if any, on its internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

Control Monitoring: The Company had not established adequate systems for monitoring the adequacy of controls to include:

• A sustainable process for periodically evaluating control design and operating effectiveness across the Company on an ongoing basis.

• An internal audit function to review financial reporting, compliance and operational controls and activities, review adequacy of remediation for known deficiencies, and provide guidance to the Company on significant control or accounting issues.

These deficiencies represented a design deficiency in internal controls which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

Financial Close and Reporting: The Company’s processes for preparing the consolidated financial statements were not clearly defined and they lack appropriate controls to ensure the completeness, accuracy, timeliness, appropriate valuation, and proper presentation and disclosure of financial transactions. The Company did not evidence reviews, approvals, and reconciliations of both routine and non-routine accounting transactions with regard to the following financial processes: expenditures, fixed assets, income taxes, financial close and reporting, and agent compensation.

This lack of financial reporting controls has resulted in the late filing of required interim and annual financial information, restatements of prior years consolidated financial statements, and a significant number of errors identified during the course of the audit of the 2004 consolidated financial statements. As a result of these errors, the Company has restated its previously issued consolidated financial statements to correct prior period errors which were related to the following balance sheet accounts, as described in Note 2 to the consolidated financial statements:

• Policy loans,

• Cash and cash equivalents,

• Deferred policy acquisition costs,

• Present value of future profits of acquired businesses,

• Agency advances and other receivables,

• Accrued investment income,

• Other liabilities, and

• Current and deferred federal income taxes related to these errors.

These deficiencies represented a design deficiency in internal controls and based on misstatements requiring correction in the financial statements, they constituted a material weakness.

Segregation of Duties: The Company did not segregate incompatible accounting functions of individuals responsible for several business processes, including:

Expenditures:

• The accounts payable clerk could add new vendors, approve new vendors, enter check transactions into the general ledger, and review and approve pending payment transactions. 

Policy Liabilities:

• The chief actuary had the ability to adjust policy reserve calculations without being subject to any additional reviews or monitoring.

Financial Close and Reporting:

• Senior level accounting personnel could both create and approve journal entries.

Reinsurance:

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• The same person who is responsible for monitoring delinquent reinsurance receivables receives the payments from reinsurers.

• The reinsurance reporting analyst had the authority to make payment requests and approve payments.

Human Resources:

• The human resource benefits coordinator had the ability to view, modify, and transfer payroll master file information without approval.

In the aggregate, these deficiencies in the design of internal controls result in more than a remote likelihood that a material error would not have been prevented or detected, and constitute a material weakness.

Reconciliations: The Company had not appropriately documented, approved, or completed timely reconciliations in several key areas including:

• Transactions related to the Company’s separate accounts,

• Premium transactions,

• Policy information processed by the Company’s Policyholder Services Division,

• Payroll transactions, and

• Agent compensation.  

These deficiencies represented a design deficiency in internal controls which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

Use of Third Party Service Providers: The Company extensively utilized third party service providers for the processing of payroll, computation of actuarial reserves, calculation of income tax balances, and the processing of separate account transactions. The Company did not have adequate controls in place to ensure completeness and accuracy of neither transactions processed nor calculations produced by these third party service providers. These deficiencies represented a design deficiency in internal controls which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

Safeguarding of Assets:The Company did not have appropriate controls in place to adequately safeguard assets including:

• Fixed asset acquisition, tracking, and disposition, and

• Procurement of only authorized goods and services

These deficiencies represented a design deficiency in internal controls which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

Reinsurance: The Company did not maintain effective controls to ensure that all policies that are subject to reinsurance were properly accounted for and ceded to the Company’s reinsurers. The Company did not have a process to adequately reconcile the in-force policy data maintained on its policy administration systems to the reinsurance settlement statements. As a result of these control deficiencies, there were many instances that occurred whereby the Company did not properly record reinsurance transactions in an accurate and timely manner. As a result, the Company recorded restatement adjustments to appropriately cede premiums and reduce reinsurance receivables as described in Note 2 to the consolidated financial statements. These deficiencies represented a design deficiency in internal controls and based on misstatements requiring correction in the financial statements, they constituted a material weakness.

Policy Data Integrity: The Company utilized multiple policy administrative systems, including both automated and manual systems, to process and account for policy related transactions associated with the various types of insurance business issued and administered by the Company. These systems were not common in nature and ranged from full functioning mainframe-based insurance administrative systems to basic spreadsheet and database systems, as well as manual systems. The Company did not have adequate controls with regard to the management of policy data maintained on these systems. There were not adequate controls with regard to the processing of policy transactions on both manual and automated administration systems, including the transfer of data between systems. Additionally, there were not adequate controls with regard to the review of policy transaction data and the identification and correction of processing errors. This lack of policy data integrity controls resulted in material errors, particularly in the calculation of the Company’s policy benefit reserve balances. These errors were a result of the actuarial reserve estimates being based on inaccurate and incomplete policy data. Additionally, these control deficiencies have resulted in errors in other financial statement account balances, including policy loans and policyholder

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benefits. As a result, the Company restated its previously issued consolidated financial statements to correct prior period errors as described in Note 2 to the consolidated financial statements.

These deficiencies represented a design deficiency in internal controls and based on misstatements requiring correction in the financial statements, they constituted a material weakness.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2004, of the Company and this report does not affect our report on such financial statements.

Because of the limitation on the scope of our audit described in the second paragraph of this report, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on management’s assessment referred to above. In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria and the effects of the other material weaknesses, if any, that might have been identified if we had been able to perform sufficient auditing procedures, the Company has not maintained effective internal control over the financial reporting as of December 31, 2004, based on the criteria established in Internal Control-Integrated Framework issued by the Commission of Sponsoring Organizations of the Treadway Commission.

We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2004, of the Company and our report dated October 27, 2006, expressed an unqualified opinion on those financial statements.

DELOITTE & TOUCHE LLP

Dallas, Texas

October 27, 2006

Change in Internal Controls over Financial Reporting

During the fourth quarter of 2004, there have been no significant changes in the Company’s disclosure controls and procedures pursuant to Rule 13a-15(f) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. However, in connection with the material weaknesses in internal control over financial reporting discussed above, management, with oversight from the Audit Committee, has been addressing all of these issues and is committed to effectively remediating known weaknesses as expeditiously as possible. Although the Company’s remediation efforts are underway, control weaknesses will not be considered remediated until new internal controls over financial reporting are implemented and operational for a period of time and tested, and management concludes that these controls are operating effectively.

During 2004, in order to comply with the provisions of the Sarbanes-Oxley Act of 2002, the Company put forth a significant and costly effort which involved both internal and external resources. This effort included the design, documentation and testing of internal controls for the major processes related to financial reporting. While management is dedicated to improving the Company’s internal controls over financial reporting, the nature and significance of the outstanding material weaknesses prevented successful remediation prior to filing the delayed 2004 Form 10-K report. Future plans include the development of a remediation plan to include establishing new controls to meet predefined control objectives, correcting improperly defined control activities and establishing procedures to ensure that control owners retain formal documented evidence that will clearly prove the effectiveness of established and newly implemented internal controls.

ITEM 9B.  OTHER INFORMATION

Not applicable.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors of the Registrant

The members of the Board of Directors of FIC, as of February 1, 2006, are as follows:

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John D. Barnett, 63, has been a director of FIC since July 1991. He is Senior Vice President-Investments of Investment Professionals, Inc., a broker-dealer located in San Antonio, Texas. He has been with Investment Professionals since 1996. From February 1999 to July 2003 he was a principal in that firm and headed its Fixed Income Division. Previously, from 1983 to 1996, Mr. Barnett was associated with Prudential Securities, Inc., where he served both institutional and individual clients. At the time he left Prudential, he was First Vice President-Investments. He has completed the NASD registered principal and investment advisor examination requirements and holds life and health insurance and variable annuity licenses. Mr. Barnett is a director of a non-profit organization. He is a graduate of Howard Payne University and earned an M.A. degree from Texas State University. He has served as a director of FIC since 1991, and has served on several committees of the Board, including the Audit Committee. He currently serves on the Investment Committee and the Special Litigation Committee.

Patrick E. Falconio, 65, has been a director of FIC since August 2003. He serves on the Executive Committee, the Investment Committee and the Nominations/Governance Committee of the Board of Directors. Mr. Falconio served as executive vice president and chief investment officer of Aegon USA, Inc. from 1987 through his retirement in 1999. Prior to that he worked at Life Investors Insurance Company, Lincoln National Life Insurance Company, and Prudential Insurance Company. In May 2004, Mr. Falconio was elected to the board of directors of Penn Treaty America Corp. He has a bachelor’s degree from Duquesne University and an MBA from the University of Georgia.

Richard H.Gudeman, 67,has been a director of FIC since August 2003. He serves on the Audit Committee, the Compensation Committee, and the Marketing Committee of the Board of Directors. Mr. Gudeman served as executive vice president at SunGard Insurance Systems, Inc., and as an actuary at Country Life Insurance Co., Washington National Insurance Co., State Farm Life Insurance Co. and Federal Life Insurance Co. over the last 30 years. He has a bachelor’s degree from Illinois State University and a master’s degree from Northeastern University.

R. Keith Long, 58,has been Chairman of the Board of FIC since August 22, 2003. He serves on the Executive Committee, the Compensation Committee, the Investment Committee, and the Marketing Committee of the Board of Directors. Mr. Long has served as president of Otter Creek Management Inc., an investment advisory firm that manages investment funds, since founding it in 1991. From 1983 through January 1991, he worked at Morgan Stanley in its capital markets division. As chairman of the board of Financial Institutions Insurance Group, he oversaw its sale in a leveraged buy-out in 1996. Mr. Long has bachelors and MBA degrees from Indiana University.

Robert A. Nikels, 66has been a director of FIC since November 1, 2005. Mr. Nikels is a retired insurance executive with more than 31 years experience in the life, annuity and health insurance business. He began his career as an actuarial student with the Lincoln National Life Insurance Company, becoming a Fellow of the Society of Actuaries in 1968. At Lincoln National he held various actuarial and management positions and retired as Senior Vice President Product Management in 1995. Mr. Nikels filled the director position left vacant by the resignation of Salvador Diaz-Verson, Jr. in July 2005. The resignation of Mr. Diaz-Verson, Jr. was announced in a Current Report on Form 8-K filed by the Company on July 18, 2005.

Lonnie Steffen, 56,has been a director of FIC since August 2003 and is Chairman of the Audit Committee. He also serves on the Executive Committee of the Board of Directors. He has served as president and chief financial officer of Dearborn Risk Management since 1997. From 1991 through 1997 he served as chief financial officer of Financial Institutions Insurance Group. From 1986 through 1991, he served as chief financial officer of First Reinsurance Co. of Hartford. A certified public accountant, Mr. Steffen has a bachelor’s degree from Northern Illinois University.

Kenneth S.Shifrin, 57,has served as a director of FIC since June 10, 2003. He serves on the Executive Committee, the Audit Committee, the Special Litigation Committee and the Nominations/Governance Committee of the Board of Directors. Since 1985, he has worked for and most recently serves as Chairman of the Board of American Physicians Service Group, Inc., a management and financial services firm that provides medical malpractice insurance services for doctors and brokerage and investment services to institutions and high net worth individuals, and has served as its President and CEO since 1989. Mr. Shifrin served as Chairman of Prime Medical Services, Inc. from 1989 until November 2004, when that company merged with HealthTronics, Inc. Following the merger and until March, 2006, Mr. Shifrin was Vice Chairman of the Board of Directors of HealthTronics, a company which provides healthcare services, primarily to the urology community, and manufactures various medical devices as well as specialty vehicles used for the transport of high technology medical equipment and broadcast and communications equipment. Mr. Shifrin is currently a director of HealthTronics. From 1977 to 1985, Mr. Shifrin was employed at Fairchild Industries Corporation, most recently as the Vice President of Finance and Contracts at Fairchild Aircraft Corporation, a subsidiary of Fairchild Industries Corporation. From 1973 to 1976, Mr. Shifrin was a Senior Management Consultant with Arthur Andersen & Company. He is a graduate of Ohio State University where he received a Bachelors and Masters in Business Administration. Mr. Shifrin is a member of the World Presidents Organization.

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Eugene J. Woznicki, 64,has been a Director of FIC since June 10, 2003. He serves on the Audit Committee, the Special Litigation Committee, the Compensation Committee, and the Marketing Committee of the Board of Directors. Mr. Woznicki is currently President of North American Life Plans, LLC, which is a marketing company specializing in the development of products that fill all the financial needs of the Senior Market. Previously, he served as President of National Health Administrators, the largest privately held insurance agency specializing in long-term care insurance, from 1997 to March 2004. From 1995 to 1997, he served as a vice president of National Health Administrators. From 1992 to 1994, Mr. Woznicki was the Vice President-Special Projects of Purolator Products, Inc., one of the largest filter companies in the world. Mr. Woznicki was the founder and President of Nicki International Inc., a construction management firm completing industrial, commercial and residential projects worldwide, from 1978 to 1992. Mr. Woznicki is a graduate of Widener University where he also did graduate studies in business administration. Mr. Woznicki served as an advisory director to the School of Industrial Engineering, Texas Tech University, from 1988 to 1994.

For a description of the arrangements whereby Messrs. Shifrin and Woznicki were previously selected as directors of the Company, see “Part III-Item 13-Certain Relationships and Related Transactions-New Era Transactions.”

The Board of Directors has determined that all current directors qualify as “independent directors” of the Company, as that term is defined in Nasdaq Rule 4200(a)(15). The Board also determined that all members of the Audit Committee, the Nominating Committee and the Compensation Committee qualify as independent in accordance with the requirements of the Nasdaq rules.

Salvador Diaz-Verson, Jr. served as a director of the Company from August 2003 until his resignation on July 14, 2005.

Executive Officers of the Registrant

The executive officers of FIC, as of June 30, 2006, are as follows:

Name Position Age

Michael P. Hydanus Interim President and Chief Executive Officer 54

Vincent L. Kasch Chief Financial Officer 44

Principal occupations and employment during the past five years are: 

Mr. Hydanus joined FIC in May, 2005 as Senior Vice President-Operations. He replaced Charles B. Cooper, who had served as Chief Operating Officer from February 2004 to November 2004. Mr. Hydanus was named Interim President and Chief Executive Officer of FIC on November 5, 2005. He replaced J. Bruce Boisture, who had served as President and Chief Executive Officer from January 7, 2004 to November 4, 2005. Mr. Hydanus has over 20 years of management experience in the life insurance and consulting industries. From February 2001 to the present, he served as an independent management consultant in the areas of corporate operations and information technology improvement. His consulting practice included clients such as a national health benefit organization, policy administration organization, and regional technology service organizations. He was Chief Operating Officer and Chief Information Officer of Security First Group from 2000 to 2001. Prior to that, he worked as the Chief Information Officer for the Baltimore Life Companies from 1998-2000 and the Senior Vice President, COO / CIO for Delta Life & Annuity from 1996-1998. Mr. Hydanus received a B.A. in Business Administration from Lakeland College. He also holds FLMI and ACS certifications from the Life Office Management Association and is in the process of earning his CLU/ChFC certifications from the American College.

Mr. Kasch joined FIC in March 2004 and was named Chief Financial Officer in April 2004. Previously, he was Senior Vice President-Financial Services for Texas Mutual Insurance Company, from February 2002 to March 2004. From January 1991 to January 2002, he was associated with National Western Life Insurance Company, where he served as Vice President-Controller and Assistant Treasurer from August 1992 to January 2002. From August 1985 to January 1991, he served in various capacities with KPMG Peat Marwick, where he held the position of Audit Manager at the time that he left to join National Western Life. Mr. Kasch received a B.B.A. in Accounting from Texas A&M University. He is a Certified Public Accountant.

Business Ethics and Practices Policy and Code of Ethics for Senior Executives and Financial Officers

The Company has adopted a Business Ethics and Practices Policy which is applicable to all employees of the Company, as well as to members of the Board of Directors. In addition, the Company has adopted a Code of Ethics for Senior Executives and Financial Officers that applies to its senior executives and senior financial officers. A copy of the Code can be found as Exhibit 14.1 to this Form 10-K, and a copy of the Policy can be found as Exhibit 14.2 to this Form 10-K. A copy of both the Code and

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the Policy can be found in the investor relations section of the Company’s website at www.ficgroup.com. In the event of any amendment to, or waiver from, the Code of Ethics, the Company will publicly disclose the amendment or waiver by posting the information on its website.

Audit Committee and Audit Committee Financial Expert

The Audit Committee’s primary function is to assist the Board in fulfilling its oversight responsibilities with respect to (i) the annual financial information to be provided to shareholders and the SEC, (ii) the system of internal controls that management has established, and (iii) the internal and external audit process. The independent auditors report directly to the Committee, which pre-approves all services that the auditors provide. In addition, the Audit Committee provides an avenue for communication between the independent accountants, financial management and the Board. Each of the members of the Audit Committee is “independent”, as defined by the current listing standards of Nasdaq. The members of the Audit Committee are Lonnie Steffen (Chairman), Richard H. Gudeman, Kenneth S. Shifrin, and Eugene J. Woznicki.

The Board of Directors has determined that Lonnie Steffen, who has chaired the Committee since August 2003, is an “audit committee financial expert” as such term is defined in Item 401(h) of Regulation S-K promulgated by the SEC, and is “independent” as such term is defined in Item 7(d)(3)(iv) of Schedule 14A.

Compliance with Section 16(a) of the Exchange Act

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

Based solely on review of the copies of such forms furnished to the Company, or written representations that no Forms 5 were required, the Company believes that during the period from January 1, 2004, through December 31, 2004, all reports required by Section 16(a) to be filed by its directors, officers and greater than ten percent beneficial owners were filed on a timely basis.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information, for the three years ended December 31, 2004, 2003, and 2002, concerning the compensation of the Company’s former Chief Executive Officer and each of the Company’s other four most highly compensated executive officers (the “named executive officers”) who were serving as executive officers at the end of 2004 and received cash compensation exceeding $100,000 during 2004 and one other person who would have been included in these standards but for the fact that he was not serving as an executive officer at the end of 2004.

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					Long-Term Compensation
		Annual Compensation ($)			Awards
Name and Principal Position	Year	Salary(1)	Bonus	Other Annual Compen- sation(2)	Restricted Stock Awards ($)	Securities Underlying Options SARs (#)	All Other Compen- sation(4) ($)
J. Bruce Boisture	2004	400,000	-	75,966(6)	700,000(8)	150,000(9)	4,100
President and CEO
Vincent L. Kasch	2004	141,346	-	-	-	20,000(13)	2,692
Chief Financial Officer
Theodore A. Fleron	2004	190,000	-	-	-	-	3,800
Vice President,	2003	197,307	-	-	-	-	3,946
General Counsel	2002	141,827	20,000	-	-	-	2,837
Thomas C. Richmond(7) Former Vice President, Assistant Secretary	2004	190,000	-	-	-	-	-
	2003	197,307	-	-	-	-	-
	2002	180,000	20,000	-	-	-	1,631
Charles B. Cooper	2004	160,769	-	16,434(15)	-	25,000(14)	-
George M. Wise(10)	2004	50,861	-	-	-	-	310,959
Former Chief	2003	197,307	-	-	-	-	2,819
Financial Officer	2002	18,269	-	-	-	-	-
Eugene E. Payne(5), (11), (12)	2004	5,538	-	-	-		551,188
Former Chairman,	2003	373,846	-	-	-	-	1,881
President and CEO	2002	68,018	-	-	-	30,000(3)	-
Jeffrey H. Demgen (16)	2004	-	-	-	-	-	222,558
Former Vice President	2003	83,076	-	-	-	-	122,650
	2002	180,000	30,000	-	-	-	3,600

(1) Information in the Salary column reflects the earned salary based on the applicable employment dates during the noted years.

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

(3) Represents the number of FIC stock appreciation rights granted to Eugene E. Payne in 2002. The stock appreciation rights were granted under the terms and provisions of the Financial Industries Corporation Equity Incentive Plan adopted by FIC in 2002, a copy of which was filed with the Securities and Exchange Commission on November 14, 2002 as an Exhibit to FIC’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002

(4) For persons other than Messrs. Payne and Wise represents amounts contributed under the InterContinental Life Corporation Employees Savings and Investment Plan (“401K Plan”). For Dr. Payne, refer to Notes 3 and 11. For Mr. Wise, refer to Note 10.

(5) Eugene E. Payne was Chairman from November 4, 2002 to August 25, 2003. Dr. Payne was President and Chief Executive Officer of FIC from November 4, 2002 to January 7, 2004, and was Interim Chairman of the Board of Directors of FIC from August 19, 2002 through November 4, 2002. R. Keith Long has served as Chairman since August 25, 2003,

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and J. Bruce Boisture served as President and Chief Executive Officer of FIC from January 7, 2004 to November 4, 2005. Michael P. Hydanus has served as Interim President and Chief Executive Officer since November 5, 2005.

(6) Represents Mr. Boisture’s expenses for apartment rent, utilities, gas, car lease, auto insurance, life insurance, appliance rental, airfare expenses, hotel, furniture, car rental and medical insurance.

(7) Effective as of February 13, 2004, the employment of Thomas C. Richmond with FIC was terminated.

(8) In connection with Mr. Boisture’s election as President and Chief Executive Officer, the Board of Directors approved an employment agreement for Mr. Boisture which included long-term incentives in the form of a restricted stock grant of 50,000 shares of FIC common stock at an exercise price equal to the fair market value on the effective date of the agreement ($14.00 per share). The grant was conditioned upon the approval by the shareholders of FIC of the Incentive Stock Plan pursuant to which the grant would be made. The agreement stated that, in the event that such approval is not granted by the shareholders, a lump sum cash payment would be made to Mr. Boisture, and his base compensation would be increased, based on a formula. If shareholder approval is obtained, a portion of the options and restricted stock will vest immediately, with the remainder vesting according to specified schedules over a two-year period from the contract effective date, subject to acceleration for certain events. In connection with the resignation of Mr. Boisture in November 2005, this grant was cancelled.

(9)  In connection with the election of Mr. Boisture as Chief Executive Officer and President of FIC in January 2004, the Board of Directors granted Mr. Boisture an option to purchase 150,000 shares of FIC common stock, at a per share price of $14.00. The grant was conditioned upon the approval by the shareholders of FIC of the FIC Incentive Stock Plan, pursuant to which the grant would be made.  In connection with the resignation of Mr. Boisture in November 2005, this grant was cancelled and replaced by an agreement under which FIC would issue 60,000 shares of its common stock to Mr. Boisture on or before June 30, 2007, provided that the Incentive Stock Plan is approved by the shareholders of FIC. If such approval is not so obtained by June 30, 2007, Mr. Boisture would receive a cash payment of $465,000, less applicable tax withholding.  As of the date of this report, the FIC Incentive Stock Plan has not yet been presented to the shareholders of FIC for approval. The table above includes the number of shares subject to the option grant made in January 2004, which was cancelled as described above.

(10) Mr. Wise was appointed as an executive officer in November 2002. Accordingly, only his compensation for the years 2002 and 2003 is included. Mr. Wise terminated his employment in April 2004. In connection with the termination of his employment agreement, Mr. Wise received a severance payment of $310,000, one-half of which was paid in January 2004 and the balance in March 2004, which is included in the “All Other Compensation” column. For additional information, see the section entitled “Certain Relationships and Related Transactions – Sale of Actuarial Risk Consultants, Inc. and Amendment to Employment Agreement of George Wise.” For 2003, amount shown in the “All Other Compensation” column also includes $2,819 of matching contributions to the Company’s 401K Plan.

(11) Amounts in the “All Other Compensation” column for 2003 include $1,881 for the 2003 401K Plan match.  Amounts in the “All Other Compensation” column for 2004 include $342,738 paid to Dr. Payne in July 2004 in connection with the termination of his employment agreement with the Company, $38,100 paid to him in connection with the exercise of stock appreciation rights and $170,349, which was deferred by Dr. Payne under the Company’s Nonqualified Deferred Compensation Plan.

(12) Amounts in the “Salary” column include $19,556 of compensation earned in 2002, and $37,384 of compensation earned in 2003, which was deferred by Dr. Payne under the Company’s Nonqualified Deferred Compensation Plan.

(13) In connection with the employment of Mr. Kasch in March 2004 and his subsequent election as Chief Financial Officer of FIC in April 2004, the Board of Directors granted Mr. Kasch an option to purchase 20,000 shares of FIC common stock, at a per share price of $13.25. The grant is conditioned upon the approval by the shareholders of FIC of the FIC Incentive Stock Plan, pursuant to which the grant would be made.  If such approval is not obtained, the grant would be cancelled.  As of the date of this report, the FIC Incentive Stock Plan has not yet been presented to the shareholders of FIC for approval.

(14) In connection with the election of Charles B. Cooper as Chief Operating Officer of FIC in February 2004, the Board of Directors granted Mr. Cooper an option to purchase 25,000 shares of FIC common stock, at a per share price of $13.88. The grant was conditioned upon the approval by the shareholders of FIC of the FIC Incentive Stock Plan, pursuant to which the grant would be made. If such approval is not obtained, the grant would be cancelled. Mr. Cooper resigned in November 2004, resulting in the cancellation of the options.

(15) Represents Charles B. Cooper’s expenses for apartment rent of $8,713, electric, gas, hotel, mileage, furniture and medical insurance.

(16) Jeffrey H. Demgen resigned employment with the Company on June 12, 2003. Under the terms of his employment agreement with the Company, as amended, his voluntary resignation did not terminate the agreement. Accordingly, Mr. Demgen will receive compensation, at the rate of $180,000 per year, until February 26, 2006. Amounts shown in the “All Other Compensation” column represent amounts paid or payable to Mr. Demgen under his employment agreement subsequent to his resignation, as follows: In 2003: $114,231 in salary continuation, $6,619 for life and health insurance benefits, and $1,800 in lieu of matching contributions to the Company’s 401K Plan. In 2004: $180,00 in salary

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continuation, $6,453 for life and health insurance, $3,600 in lieu of matching contributions to the 401K Plan, and a lump sum payment of $32,505 representing the present value of pension benefits that would have otherwise accrued under the Company's pension plan for the period from June 15, 2003 to December 31, 2005. In 2005: $180,000 in salary continuation, $5,431 for life and health insurance, and $3,600 in lieu of matching contributions to the 401K Plan. In 2006: $27,692 in salary continuation.

Stock Options Granted in 2004

The following table sets forth information regarding stock options granted to the named executive officers during the fiscal year ended December 31, 2004.

	Number of Securities Underlying Options Granted	Percent of Total Options Granted to Employees	Exercisable or Base Price	Expiration	Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(4)
Name	(#)	in Fiscal Year	($/Sh)	Date	5% ($)	10% ($)
J. Bruce Boisture(1)	150,000	76.92%	$14.00	1/7/2014	$1,320,679	$   3,346,859
Vincent L. Kasch(2)	20,000	10.26%	$13.25	3/14/2014	166,657	422,342
Charles B. Cooper(3)	25,000	12.82%	$13.88	2/16/2014	218,226	553,029

(1) In connection with the election of Mr. Boisture as Chief Executive Officer and President of FIC in January 2004, the Board of Directors granted Mr. Boisture an option to purchase 150,000 shares of FIC common stock, at a per share price of $14.00. The grant was conditioned upon the approval by the shareholders of FIC of the FIC Incentive Stock Plan, pursuant to which the grant would be made. In connection with the resignation of Mr. Boisture in November 2005, this grant was cancelled and replaced by an agreement under which FIC would issue 60,000 shares of its common stock to Mr. Boisture on or before June 30, 2007, provided that the Incentive Stock Plan is approved by the shareholders of FIC.  If such approval is not so obtained by June 30, 2007, Mr. Boisture would receive a cash payment of $465,000, less applicable tax withholding.  As of the date of this report, the FIC Incentive Stock Plan has not yet been presented to the shareholders of FIC for approval. The table above includes the number of shares subject to the option grant made in January 2004, which was cancelled as described above.

(2) In connection with the employment of Mr. Kasch in March 2004 and his subsequent election as Chief Financial Officer of FIC in April 2004, the Board of Directors granted Mr. Kasch an option to purchase 20,000 shares of FIC common stock, at a per share price of $13.25. The grant is conditioned upon the approval by the shareholders of FIC of the FIC Incentive Stock Plan, pursuant to which the grant would be made. If such approval is not obtained, the grant would be cancelled.  As of the date of this report, the FIC Incentive Stock Plan has not yet been presented to the shareholders of FIC for approval.

(3) In connection with the election of Charles B. Cooper as Chief Operating Officer of FIC in February 2004, the Board of Directors granted Mr. Cooper an option to purchase 25,000 shares of FIC common stock, at a per share price of $13.88. The grant was conditioned upon the approval by the shareholders of FIC of the FIC Incentive Stock Plan, pursuant to which the grant would be made. If such approval is not obtained, the grant would be cancelled. Mr. Cooper resigned in November 2004, resulting in the cancellation of the options.

(4) Potential realizable value of each grant assumes that the market price of the underlying security (based upon the value of the Common Stock on the date of grant) appreciates at annualized rates of 5% and 10% over the term of the award. Actual gains, if any, on stock option exercises are dependent on the future performance of Common Stock and overall market conditions.  There can be no assurance that the amounts reflected on this table will be achieved.

Aggregated Option/SAR Exercises in 2004 and Year-end Option/SAR Values

The following table sets forth information concerning unexercised stock options as of December 31, 2004, of the named executive officers as of that date. As noted above, such option grants are subject to the approval by the shareholders of FIC of the FIC Incentive Stock Plan. No stock options were exercised during 2004 by any named executive officers during the year 2004. Since the market value of FIC common stock as of December 31, 2004, was less than the option prices, the table below does not include information pertaining to the value of unexercised in-the-money options.

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			Number of Securities		Value of Unexercised
			Underlying		In-the-Money
	Shares	Value	Unexercised Options at		Options at
	Acquired on	Realized	December 31, 2004 (#)		December 31, 2004(4) ($)
Name	Exercise (#)	($)	Exercisable	Unexercisable	Exercisable	Unexercisable
J. Bruce Boisture(1)	-	$           -	-	150,000	$              -	$                 -
Vincent L. Kasch(2)	-	-	-	20,000	-	-
Charles B. Cooper(3)	-	-	-	-	-	-

(1) Includes options to purchase 150,000 shares of common stock of FIC at a price per share of $14.00 granted by FIC in January 2004 to J. Bruce Boisture, in connection with his election as Chief Executive Officer and President of FIC.  The grant was conditioned upon the approval by the shareholders of FIC of the Incentive Stock Plan pursuant to which the grant would be made. As of the date of this report, the Incentive Stock Plan has not been presented to the shareholders of FIC for approval. In connection with the resignation of Mr. Boisture in November 2005, this grant was cancelled and replaced by an agreement under which FIC would issue 60,000 shares of its common stock to Mr. Boisture on or before June 30, 2007, provided that the Incentive Stock Plan is approved by FIC’s shareholders. If such approval is not so obtained by June 30, 2007, Mr. Boisture would receive a cash payment of $465,000, less applicable tax withholding. The table includes the number of shares subject to the option granted in January 2004, which was cancelled as described above.

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

(3) In connection with the election of Charles B. Cooper as Chief Operating Officer of FIC in February 2004, the Board of Directors granted Mr. Cooper an option to purchase 25,000 shares of FIC common stock, at a per share price of $13.88. The grant was conditioned upon the approval by the shareholders of FIC of the FIC Incentive Stock Plan, pursuant to which the grant would be made. If such approval is not obtained, the grant would be cancelled.  Mr. Cooper resigned in November 2004, resulting in the cancellation of the options.

(4) Based on the closing price of the Company’s common stock of $8.00 on the National Quotation Bureau’s Pink Sheet quotation service on December 31, 2004, the options had no in-the-money value as of December 31, 2004. The actual amount, if any, realized upon the exercise of stock options will depend upon the amount by which the market price of the Company’s common stock on the date of exercise exceeds the exercise price.

Defined Benefit Plan

The following Pension Plan description sets forth estimated annual pension benefits payable upon retirement at age 65 under the Company’s noncontributory defined benefit plan (“Pension Plan”) to an employee in the final pay and years of service classifications indicated, assuming a straight life annuity form of benefit. The amounts described do not reflect the reduction related to Social Security benefits referred to below. The Pension Plan was frozen effective December 31, 2004.

J. Bruce Boisture and Vincent L. Kasch did not become Pension Plan participants before December 31, 2004, when the Pension Plan was frozen, due to Pension Plan eligibility requirements. Charles B. Cooper and George Wise were terminated on November 1, 2004 and April 22, 2004, respectively, prior to reaching eligibility for Pension Plan participation.

Theodore A. Fleron’s normal retirement date of April 1, 2005 had a frozen monthly Pension Plan benefit of $7,126 based upon 30.878 years of frozen credited service. Eugene Payne’s normal retirement date of September 1, 2007 had a frozen monthly Pension Plan benefit of $2,404 based upon 12.764 years of frozen credited service. Thomas Richmond’s normal retirement date of October 1, 2006 had a frozen monthly Pension Plan benefit of $2,470 based upon 14.897 years of frozen credited service.

Mr. Fleron received a lump sum payment of $48,000 at the end of 2005 based upon a defined benefit supplemental executive retirement plan (“DB SERP”) that was formed effective January 1, 2005 and terminated on December 31, 2005. Mr. Fleron was the only participant in the DB SERP of those named executive officers listed on the executive compensation table above.

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Mr. Kasch received a $455 lump sum payment based upon a defined contribution supplemental executive retirement plan (“DC SERP”) that was formed effective January 1, 2005 and terminated on December 31, 2005. Mr. Kasch was the only participant in the DC SERP of those named executive officers listed on the executive compensation table above.

The normal retirement benefit provided under the Pension Plan is equal to 1.57% of final 5-year average eligible earnings less 0.65% of the participant’s Social Security covered compensation multiplied by the number of years of credited service (up to 30 years). The compensation used in determining benefits under the Pension Plan is the highest average earnings received in any five consecutive full-calendar years during the last ten full-calendar years before the participant’s retirement date. For the year of the Pension Plan freeze (2004), the maximum amount of annual salary and bonus that can be used in determining benefits under the Pension Plan is $180,000.

Compensation of Directors

In September 2003, the Board of Directors adopted a new compensation policy for non-employee directors. Effective as of September 29, 2003, each non-employee director of the Company receives, as a payment for services as a director, an annual fee of $25,000, payable annually, plus $1,500 for each meeting of the Board of Directors at which such director is in attendance. Non-employee directors who serve on committees of the Board, other than the Audit Committee, the Investment Committee or the Executive Committee, receive an annual fee of $2,000, plus $1,500 for each meeting at which the director is in attendance. Non-employee directors who serve on the Audit Committee or the Investment Committee receive an annual fee of $5,000 ($7,000 with respect to the Chairman of such committee), plus $1,500 for each meeting of the Audit Committee or the Investment Committee at which the director is in attendance. Non-employee directors who serve on the Executive Committee receive an annual fee of $10,000, plus $1,500 for each meeting of the Executive Committee. Prior to November 2004, the compensation policy provided that the Chairman of the Executive Committee was entitled to an annual fee of $20,000. At its meeting in November 2004, the Board of Directors approved a modification of the compensation policy whereby the annual fee for the Chairman of the Executive Committee was reduced to $10,000. In the event that a director attends a meeting of the Board of Directors, or committee of the Board of Directors, which has been designated as a regular meeting via telephone, rather than in person, the fee payable to such director for attendance at such regular meeting is reduced to $500.

Mr. Long waived payment of the annual fees for the period between the 2003 and 2004 Annual Meetings of Shareholders otherwise payable to him as a director and as a member of the Executive and Investment Committees of the Board.

At its meeting on September 1, 2004, the Board of Directors approved the establishment of a stock option plan for non-employee directors of the Company, subject to the approval of the plan by the shareholders of the Company at the next Annual Meeting of Shareholders. The plan, which reserves 400,000 shares for issuance, provides for the grant to each non-employee director options to acquire 25,000 shares of the common stock of the Company, at current market price at the time that the plan is approved by the shareholders, and allows for discretionary grants to subsequently elected directors and to directors who are reelected. Such options would have a ten-year term, would vest in three equal annual installments beginning with the first anniversary of the date on which the option was granted, and would vest earlier upon specified events.

At its meeting on September 19-20, 2005, the Board of Directors approved the Financial Industries Corporation Stock Plan for Non-Employee Directors (the “Stock Plan”). Under the Stock Plan, effective September 30, 2005, non-employee directors may elect to receive a portion of their annual fee for service on the Board and their annual fee(s) for service on a committee(s) of the Board in the form of shares of common stock of the Company, in lieu of cash. The election is made on an annual basis and may be for fifty percent or more, in five percent increments, of the annual fees for a Plan Year (as defined in the Stock Plan). The shares of common stock issued under the Stock Plan are to be shares of the Company’s authorized but unissued or reacquired common stock.

Employment Agreements and Change in Control Arrangementss

The following employment agreements were in effect during 2004 with respect to the individuals listed in the Summary Compensation Table:

J. Bruce Boisture. Mr. Boisture served as President and CEO of the Company from January 7, 2004 through November 2005. Mr. Boisture also served on the Board of Directors of FIC from August 2003 through November 2005. He replaced Eugene E. Payne, who had served as President and CEO since November 2002. In connection with the election, the Board of Directors approved an employment agreement for Mr. Boisture. The agreement, which was for a three-year term, provided for monthly base compensation of $33,333.33 and eligibility for an annual performance bonus of up to $100,000. In addition, the agreement

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provided for long-term incentives in the form of a grant of options to purchase 150,000 shares of FIC common stock at an exercise price equal to the fair market value on the effective date of the agreement ($14.00 per share) and a restricted stock grant of 50,000 shares. Both grants are conditioned upon the approval by the shareholders of FIC of the Incentive Stock Plan pursuant to which the grants would be made. The agreement states that, in the event that such approval is not granted at the Company’s 2004 annual meeting of shareholders, a lump sum cash payment would be made to Mr. Boisture, and his base compensation would be increased, based on a formula. If shareholder approval is obtained, a portion of the options and restricted stock will vest immediately, with the remainder vesting according to specified schedules over a two-year period from the contract effective date, subject to acceleration for certain events.

Mr. Boisture’s agreement provided that he was to be included in the employee benefit plans that FIC maintains for all similarly situated executives, except that in lieu of the company’s group life insurance plan, FIC was to provide him with $1 million of term life insurance coverage. In addition, while Mr. Boisture’s primary residence remained in Hartford, Connecticut, FIC covered specified commuting expenses, including transportation, a furnished apartment, leased automobile and club membership in Austin at an aggregate cost to FIC (including tax gross-ups) not to exceed $5,200 per month through October 31, 2005, and reimbursement of up to $12,000 per year for Mr. Boisture’s existing health care coverage until at least October 31, 2005. The Company was required to pay certain relocation expenses, if incurred by Mr. Boisture. The agreement also provided that FIC was to reimburse Mr. Boisture for certain attorneys’ fees incurred in the review of the employment agreement up to a maximum of $5,000, and obligated FIC to provide directors and officers liability insurance.

In the event of termination of Mr. Boisture’s employment without cause or for good reason (as defined in his employment agreement), Mr. Boisture was entitled to a lump sum payment of $400,000 and six months of continued subsidized FIC health insurance coverage or reimbursement of his existing health insurance coverage. If Mr. Boisture’s employment was terminated due to disability, the lump sum severance benefit was to be offset by the value of any disability benefits to be provided during the first 12 months following his termination of employment by any disability benefits plan maintained by FIC. Upon Mr. Boisture’s termination of employment by FIC for cause, due to Mr. Boisture’s death or expiration of the term, or Mr. Boisture’s voluntary termination of employment without good reason, Mr. Boisture was not entitled to any severance other than payment of accrued salary and benefits as of the date of termination.

The agreement also provided that, in the event that following shareholder approval of the Incentive Stock Plan and while Mr. Boisture remained employed by the Company (i) any SEC Person (as defined below) became the beneficial owner of 50% or more of the shares outstanding or of voting securities representing 50% or more of the combined voting power of all outstanding voting securities of the Company or (ii) the sale or other disposition of all or substantially all of the consolidated assets of the Company was completed or a plan of liquidation of the Company was implemented, then the option to purchase 150,000 shares became immediately exercisable and 50,000 shares of restricted stock became immediately vested. As defined in the agreement, “SEC Person” means any person (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”)) or group (as such term is used in Rule 13d-5 under the Exchange Act), other than an affiliate or any employee benefit plan (or any related trust) of the Company or any of its affiliates.

In November 2005, Mr. Boisture tendered his resignation as Chief Executive Officer, President and a director of the Company, effective November 4, 2005. In connection with Mr. Boisture’s resignation, the Company entered into a Separation Agreement and Release arrangement with Mr. Boisture (the “Separation Agreement”), the material provisions of which included the following:

• The Company paid Mr. Boisture cash severance benefits in the amount of $200,000, in five monthly installments of $40,000 each, less applicable tax withholding, with the first payment to be made on November 4, 2005, and subsequent payments on December 4, 2005, January 4, 2006, February 4, 2006, and March 4, 2006.

• On June 30, 2007, the Company will: (i) deliver to Mr. Boisture 60,000 shares of FIC common stock, if approval of such issuance by FIC’s shareholders is obtained on or prior to June 30, 2007, or (ii) if such approval by FIC’s shareholders is not obtained on or prior to June 30, 2007, pay to Mr. Boisture $465,000 in a lump sum cash payment, in either case less applicable tax withholding.

• If a Change of Control (as defined in the Separation Agreement) of FIC occurs on or prior to June 30, 2007, the Company is required to pay Mr. Boisture, less applicable tax withholding, (a) any portion of the cash  severance benefits described above which have not yet been paid, and (b) in satisfaction of FIC’s obligations under the immediately preceding paragraph,  an amount equal to the product of (x) 60,000 and (y) the per-share value imputed or assigned to FIC’s common stock at the time of such Change of Control (as specified in the Separation Agreement). 

• If a Change of Control of FIC occurs after June 30, 2007, but before December 31, 2008, the Company is generally required to pay Mr. Boisture in cash, less applicable withholding, an amount equal to the product of (x) the number of shares (if any) issued to Mr. Boisture on June 30, 2007, as described above,  and still owned by him at the time of

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such Change of Control and (y) the per-share value imputed or assigned to FIC’s common stock at the time of such Change of Control.

• The obligations of the Company under the employment agreement between the Company and Mr. Boisture dated January 7, 2004 (the “Employment Agreement”), terminated as of November 4, 2005, subject to payment of certain salary and employee benefit obligations accrued prior to that date.

• The Separation Agreement includes certain mutual releases pertaining to the Employment Agreement and Mr. Boisture’s service with the Company. 

• The Separation Agreement provides that the Company may require the future assistance of Mr. Boisture in matters relating to legal proceedings, and may request his consultation or assistance in other matters relating to the Company. If such services are provided, the Company will pay Mr. Boisture at the rate of $150 per hour if no travel is involved and at the rate of $1,500 per day if travel is involved.

Vincent L. Kasch. In connection with his election as Chief Financial Officer, Mr. Kasch received a letter which set forth the terms of his employment with FIC (the “Employment Letter”). The Employment Letter provides that he may receive long-term incentives in the form of a grant of non-qualified stock options to purchase 20,000 shares of FIC common stock. The purchase price for each share subject to the option is equal to $13.25, which was the fair market value of a share of FIC common stock as of March 15, 2004, the effective date of his employment. The option will (a) have a ten-year term measured from the employment date and (b) become exercisable as to one-third of the shares on the date of shareholder approval of an equity option plan, an additional one-third of the shares on the first anniversary of the employment date, and as to the remaining shares on the second anniversary of the employment date, provided in each case that Mr. Kasch remains employed by FIC on such anniversary. The option grant is subject to the approval of the shareholders of FIC. On September 7, 2006, Mr. Kasch received a letter from FIC (“Change of Control letter”) which set forth the parties’ agreement with respect to a possible future Change of Control (as defined in the Change of Control letter) of the Company.  If a Change of Control occurs and Mr. Kasch is terminated without cause within twelve months after such change of control, his then-current bi-weekly salary and benefits, will continue to be paid by the Company for twelve months following his date of termination; provided, however, that to the extent such 12-month continuation period would otherwise extend beyond March 15th of the calendar year following the calendar year in which the termination occurs, any remaining payments that would otherwise be made to Mr. Kasch after March 15th of the following calendar year will be accelerated and paid in a lump sum on March 15th of the following calendar year.

Theodore A. Fleron. On December 13, 2002, the Company and Mr. Fleron entered into an employment agreement, providing for the employment of Mr. Fleron as General Counsel and Vice President of the Company. The agreement provides for a three-year term; however, at the end of the term the agreement is automatically renewed for successive one-year periods unless either the Company or Mr. Fleron gives notice at least 90 days before the end of any term that they choose not to renew the agreement. The agreement provides for a base salary of $190,000, which base salary shall be reviewed periodically and may be increased from time to time as shall be determined by the Chief Executive Officer and subsequently ratified by the Board. Mr. Fleron is also eligible for an annual bonus based upon target performance goals, as determined by the Chief Executive Officer on an annual basis, in accordance with normal Company administrative practices for senior management, as described above. A copy of this agreement was attached as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, as filed with the Securities and Exchange Commission.

The above-described agreement replaced a prior employment agreement between the Company and Mr. Fleron which had been entered into on March 22, 2002. That agreement provided for a three-year term, with a base salary of $145,000. The agreement also provided that, in the event of a “change in control” of the Company, the remaining amounts payable under the agreement would become immediately due and payable in one lump sum. As defined in the agreement, a change in control was deemed to have taken place upon the occurrence of any one or more of the following: (i) Roy F. Mitte is no longer the Chairman, President and Chief Executive Officer of the Company, or (ii) a majority of the members of the Board of Directors of the Company are not individuals who were selected to serve as Directors by Roy F. Mitte. No change in control payments were made to Mr. Fleron under the provisions of the prior agreement.

In December 2005, Theodore A. Fleron, who had served as Vice President, General Counsel and Secretary of FIC, retired. He continues to be available as a consultant to the Company.

Eugene E. Payne. On November 4, 2002, the Company and Dr. Payne entered into an employment agreement, providing for the employment of Dr. Payne as Chairman, President and Chief Executive Officer of the Company. The agreement provided for an initial three-year term, with a provision for automatic extensions after the first anniversary. The initial base salary under the agreement was $360,000 per year. During the employment period, the base salary shall be reviewed periodically and may be increased from time to time as shall be determined by the Board of the Company. The agreement also included a provision

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for an annual bonus, based upon target performance goals as determined by the Board of Directors on an annual basis. The agreement also provided for an award of stock appreciation rights (SARs) with respect to 30,000 shares of the Common Stock of the Company, pursuant to terms and provisions of the Financial Industries Corporation Equity Incentive Plan. A copy of the agreement is attached as an exhibit to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2002.

On August 25, 2003, Dr. Payne resigned as Chairman of the Board. In connection with the resignation, Dr. Payne and the Company entered into an amendment to the employment agreement. Under the terms of the amendment, Dr. Payne agreed to continue as President and CEO for a period ending on February 20, 2004, subject to the right of the Company to terminate the employment period at an earlier date. At the end of the employment period, the amendment provides that Dr. Payne is entitled to receive a severance payment in the amount of $360,000, net of applicable taxes. On January 6, 2004, the Company notified Dr. Payne that it was exercising its right to terminate the employment period on January 7, 2004. The employment agreement provides that, following the end of the employment period, the parties will execute a mutual release with respect to matters relating to the employment relationship. In connection with the preparation of the mutual release agreement, the Company asserted its right to offset the severance payment by the amount of certain payments and obligations which had been made by Dr. Payne, but not approved by the Board of Directors. In July 2004, the Company and Dr. Payne reached agreement as to the adjusted amount of the severance payment, with Dr. Payne receiving a payment in the amount of $342,738. Dr. Payne resigned from the Company’s Board of Directors effective July 27, 2004.

Thomas C. Richmond. On December 13, 2002, the Company and Mr. Richmond entered into an employment agreement, providing for the employment of Mr. Richmond as Chief Operating Officer and Vice President of the Company. The agreement provided for a three-year term; however, at the end of the term the agreement provided for automatically renewal for successive one-year periods unless either the Company or Mr. Richmond gave notice at least 90 days before the end of any term that they choose not to renew the agreement. The agreement provided for a base salary of $190,000, which base salary would be reviewed periodically and may be increased from time to time as shall be determined by the Chief Executive Officer and subsequently ratified by the Board. Mr. Richmond was also eligible for an annual bonus based upon target performance goals, as determined by the Chief Executive Officer on an annual basis, in accordance with normal Company administrative practices for senior management, as described above. A copy of this agreement was attached as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

The above-described agreement replaced a prior employment agreement between the Company and Mr. Richmond which had been entered into on May 1, 2002. That agreement provided for a term ending on December 31, 2005, with a base salary of $180,000.

Effective as of February 13, 2004, the employment of Thomas C. Richmond with FIC was terminated. FIC and Mr. Richmond entered into an amendment to his employment agreement, which provides that the employment period ends as of February 13, 2004. Following the end of the employment period, Mr. Richmond received severance payments on a bi-weekly basis until December 13, 2005, at the annual salary rate ($190,000) set forth in the original employment agreement, net of applicable taxes. In addition, Mr. Richmond received certain medical, dental and life insurance benefits during the period that he received severance payments.

George M. Wise, III. On December 13, 2002, the Company and Mr. Wise entered into an employment agreement, providing for the employment of Mr. Wise as Chief Financial Officer and Vice President of the Company. The agreement provided for a three-year term; however, at the end of the term the agreement was automatically renewed for successive one-year periods unless either the Company or Mr. Wise gave notice at least 90 days before the end of any term that they choose not to renew the agreement. The agreement provides for a base salary of $190,000, which base salary was to be reviewed periodically and may be increased from time to time as shall be determined by the Chief Executive Officer and subsequently ratified by the Board. Mr. Wise was also eligible for an annual bonus based upon target performance goals, as determined by the Chief Executive Officer on an annual basis, in accordance with normal Company administrative practices for senior management, as described above. A copy of this agreement was attached as an exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 as filed with the SEC.

On December 31, 2003, Mr. Wise and the Company entered into an amendment to Mr. Wise’s employment agreement. The amendment provided that the term of the agreement ended on March 31, 2004, instead of December 31, 2005, at which time Mr. Wise’s employment terminated. The Company subsequently agreed to extend Mr. Wise’s employment to April 26, 2004. Effective January 1, 2004, the annual rate of compensation was reduced to $152,000 per year, and Mr. Wise was permitted to devote up to one day each week to the business of Actuarial Risk Consultants, Inc., a former subsidiary of the Company that was sold to Mr. Wise on December 31, 2003. Under the amendment, Mr. Wise received a severance payment of $310,000,

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one-half of which was paid in January 2004 and the balance on March 31, 2004. In connection with the amendment, Mr. Wise released FIC from any claims he may have, including claims related to matters arising out of his employment agreement or his employment relationship with FIC.

Other Employment Agreements

Michael P. Hydanus. In connection with his election as Senior Vice President-Operations, Mr. Hydanus received a letter from FIC, dated April 19, 2005, which set forth the terms of his employment with FIC (the “COO Employment Letter”). The COO Employment Letter provided that he may receive long-term incentives in the form of a grant of options to purchase 15,000 shares of FIC common stock at an exercise price equal to the fair market value on the date that the options are granted. The option provision was conditional upon the approval of an equity option plan by the shareholders of FIC. Accordingly, such options would be granted only following shareholder approval of the equity option plan and approval by the Company’s Compensation Committee of a grant of options.

The COO Employment Letter also provided that, if FIC terminated Mr. Hydanus’ employment without Cause (as defined in the COO Employment Letter), or Mr. Hydanus terminated his employment for Good Reason (as defined in the COO Employment Letter), he would be entitled to a continuation of his salary payments for twelve months after the date of termination. If FIC terminated Mr. Hydanus without Cause, or he terminated his employment with Good Reason, at any time within twelve months of a Change of Control (as defined in the COO Employment Letter), he would be entitled to a continuation of his salary payments for twenty-four months after the date of termination.

On January 5, 2006, in connection with his agreement to serve as Interim President and Chief Executive Officer of the Company, Mr. Hydanus received a letter, effective October 15, 2005, from FIC which set forth terms of such appointment (the “Employment Letter”). Pursuant to the Employment Letter, Mr. Hydanus agreed to assume all of the duties and responsibilities of Chief Executive Officer of the Company and to continue those duties until (1) he is appointed Chief Executive Officer of the Company permanently by the Board of Directors of FIC or (2) another person is appointed Chief Executive Officer of the Company by the Board of Directors of FIC, in its discretion, and Mr. Hydanus is reassigned to assume his duties as Chief Operating Officer of the Company pursuant to the COO Employment Letter. The Employment Letter is intended to amend and restate the COO Employment Letter, provided that to the extent that any terms of the COO Employment Letter do not conflict with the Employment Letter, such terms of the COO Employment Letter will be considered valid and continue in full force and effect. The terms of the Employment Letter will be binding and effective for so long as Mr. Hydanus serves as Interim Chief Executive Officer or permanent Chief Executive Officer of the Company.

The Employment Letter provides that Mr. Hydanus will be paid an annual salary of $294,000 and will be eligible for an annual bonus to be determined prior to the beginning of each fiscal year based on goals established by the Board of Directors of FIC. The Employment Letter additionally provides that Mr. Hydanus will continue to be eligible to participate in stock option plans of the Company on the same basis as his participation as when he was Senior Vice President-Operations and that the Board of Directors of FIC, in its discretion, may grant additional option rights to Mr. Hydanus commensurate with his position as the Interim Chief Executive Officer of the Company.

The Employment Letter provides that either the Company or Mr. Hydanus may terminate Mr. Hydanus’ employment at any time, provided that if the Company terminates Mr. Hydanus’ employment without cause (as defined in the Employment Letter) or Mr. Hydanus terminates his employment for good reason (as defined in the Employment Letter), Mr. Hydanus will be entitled to continue to receive his salary and benefits for a period of twelve months after the date of termination. The Employment Letter additionally provides that if the Company terminates Mr. Hydanus’ employment without cause or Mr. Hydanus terminates his employment for good reason at any time within six months before or twelve months after a change of control of the Company (as defined in the Employment Letter), Mr. Hydanus will be entitled to continue to receive his salary and benefits for a period of twenty-four months after the date of termination. Mr. Hydanus will additionally be entitled to receive certain benefits in the event he is terminated by the Company upon certain disabilities.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of our board of directors currently consists of Messrs. Long, Woznicki and Gudeman. None of these individuals has been an officer or employee of the Company at any time. No current executive officer has ever served as a member of the board of directors or compensation committee of any other entity (other than our subsidiaries) that has or has had one or more executive officers serving as a member of our board of directors or our Compensation Committee.

Report of the Compensation Committee on Executive Compensation

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Overview

The Compensation Committee of the Board of Directors has theresponsibility for establishing the Company’s compensation principles and strategies and designing a compensation program for executive officers.  The committee is currently comprised of three directors – R. Keith Long, Richard H. Gudeman and Eugene J. Woznicki.  Mr. Woznicki serves as the Chairman of the committee.  Both Mr. Gudeman and Mr. Woznicki have served on the committee since June 2003.  Mr. Long has served on the committee since February 2005. 

The committee reviews corporate goals and objectives relevant to the compensation of the Chief Executive Officer (“CEO”), evaluates the performance of the CEO in light of those goals and objectives, and recommends to the Board the CEO’s compensation level based on such evaluation.  In determining the long-term incentive component of CEO compensation, the Committee considers, among other factors, the Company’s performance and relative stockholder return, the value of similar incentive awards to CEOs at comparable companies, and the awards given to the CEO in past years.

In addition, the committee reviews and recommends to the Board the compensation of other executive officers, and makes recommendations to the Board with respect to the Company’s incentive compensation plans and equity-based compensation plans.

The year 2004 presented significant challenges for FIC, its Board and management team.  In January 2004, Board elected Mr. Boisture as Chief Executive Officer and President.  The committee took steps to establish a compensation framework for Mr. Boisture and to implement an employment agreement which reflected that framework. 

Subsequently, in February 2004, the Board appointed Charles B. Cooper as Chief Operating Officer (who resigned in November 2004), and, in April 2004, the Board appointed Vincent L. Kasch as Chief Financial Officer. In May 2005, the Board appointed Michael P. Hydanus as Chief Operating Officer. The committee participated in the compensation arrangements associated with these appointments.

The compensation arrangements of the other individuals who served as executive officers during 2004 were established in accordance with employment agreements which were entered into in 2002.

Compensation Principles and Framework

The compensation practices and programs for executive officers, as discussed in this report and elsewhere in Item 11 of this Annual Report of Form 10-K, are intended to provide a balance of base salary, fringe benefits and stock-based awards to promote performance over the longer-term.  During 2004, the Board adopted an Incentive Stock Plan, subject to the approval of the plan by the shareholders of the Company.  The plan provides for the award of incentive stock options, non-qualified stock options, or restricted stock to key employees. 

In developing compensation principles and strategies, the committee considers the current and prospective business environment for FIC, and takes into account a number of business factors, including the competitive environment in which the Company operates; the need to attract and retain executives of outstanding ability and experience; the need to motivate executives to achieve superior performance; and the need to align the interests of executives and shareholders. 

Components of Executive Compensation

During 2004, the Company employed three executive officers, J. Bruce Boisture, Charles Cooper and Vincent L. Kasch.  In 2005, the Company employed Michael P. Hydanus.  Mr. Hydanus replaced Mr. Cooper as Chief Operating Officer.  Following the resignation of Mr. Boisture, Mr. Hydanus became the Interim President and Chief Executive Officer. Compensation for these individuals included base salaries, potential incentive compensation and stock-based compensation.

Base Salaries:  Base salaries of the Company’s executive officers were established at levels that the Committee believes are appropriate after consideration of each executive’s responsibilities and salaries offered at similar companies in the insurance industry. 

Annual Incentive Awards:   For the years 2004 and 2005, the Committee recommended minimal bonus awards.  This decision reflected the continuing efforts of the Company to become current in its financial filings and to develop a business plan for the future operation of the Company.

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Stock-based Compensation:  Stock options and restricted stock grants are intended to provide a significant potential value that reinforces the importance of creating value for the shareholders of the Company.  In 2004 and 2005, the Committee recommended stock option grants to each of the executives who were employed during that period.  In addition, in the case of Mr. Boisture, the Committee recommended the award of shares of restricted stock.  These grants and awards were conditioned upon approval of the Incentive Stock Plan by the shareholders of the Company.

Compensation Committee

Eugene J. Woznicki, Chairman

R. Keith Long

Richard H. Gudeman

Stock Performance Graph

This graph shows FIC's cumulative total shareholder return during the five fiscal years ending with fiscal 2005. The graph also shows the cumulative total returns of the Nasdaq stock market and the Nasdaq insurance stock index. The comparison assumes $100 was invested on January 1, 2000 in shares and in each of the indices shown and assumes that all of the dividends were reinvested.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Stock Ownership of Certain Beneficial Owners

The following table presents information as of June 30, 2006, as to all persons who, to the knowledge of the Company, were the beneficial owners of five percent (5%) or more of the Company’s Common Stock.

			Percent of
		Number of	Outstanding
Name and Address		Shares Owned	Shares
Roy F. and Joann Cole Mitte Foundation		968,804 (1)	9.84%
	6836 Bee Caves Road, Suite 262
	Austin, Texas 78746
Roy F. Mitte		968,804 (2)	9.84%
	3701 Westlake Drive
	Austin, Texas 78746
Family Life Insurance Company		648,640 (3)	6.18%
	6500 River Place Blvd., Building One
	Austin, TX 78730
Investors Life Insurance Company of North America		1,427,073 (3)	12.66%
	6500 River Place Blvd., Building One
	Austin, TX 78730
Fidelity Management & Research Company		1,302,480 (4)	13.22%
	82 Devonshire Street
	Boston, MA 02109
Wellington Management Company, LLP		607,300 (5)	6.17%
	75 State Street
	Boston, MA 02109
Financial & Investment Management Group, Ltd.		643,797 (6)	6.54%
	111 Cass St.
	Traverse City, MI  49684

(1) Based on information reported on a Schedule 13G filed by the Roy F. and Joann Cole Mitte Foundation on February 4, 2005, and based on information known to the Company. According to the 13G filing, the Foundation is a not-for-profit corporation organized under the laws of the State of Texas, and exempt from federal income tax under Section 501(a) of the Internal Revenue Code of 1986, as amended, as an organization described in Section 501(c)(3). See “Certain Transactions” for a description of certain arrangements regarding the voting and disposition of shares held by the Mitte Foundation.

(2) For purposes of this table, Mr. Mitte is deemed to have beneficial ownership of the shares owned by the Foundation.

(3) All shares are held as treasury shares. For purposes of determining the ownership percentage, such shares are assumed to be outstanding. These shares may not be voted and are not included in determining the percentage of shares voting in favor of a matter.

(4) As reported to the Company on a Schedule 13G/A filed on February 17, 2004, by FMR Corporation, the parent company of Fidelity Management & Research Company (“Fidelity”). According to such Schedule 13G/A Fidelity is an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of 1,302,480 shares or 13.44% of the Common Stock outstanding of FIC as a result of acting as investment adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940. The ownership of one investment company, Fidelity Low Priced Stock Fund, amounted to 1,302,480 shares or 13.44% of the Common Stock outstanding. Neither FMR Corp. nor the Chairman of FMR Corp., has the sole power to vote or direct the voting of the shares owned directly by the Fidelity Funds, which power resides with the Funds’ Boards of Trustees. Fidelity carries out the voting of the shares under written guidelines established by the Funds’ Boards of Trustees.

(5) As reported on a Schedule 13G/A filed by Wellington Management Company, LLP (“WMC”) on February 12, 2004. According to the Schedule 13G filing, WMC acts as investment advisor to certain clients of WMC and such clients have

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the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities. The filing further states that no such client is known to have such right or power with respect to more than five percent of the common stock of the Company.

(6) Based on information reported on a Schedule 13G filed by Financial & Investment Management Group, Ltd on February 9, 2006. According to the 13G filing, Financial & Investment Management Group, Ltd is a registered investment advisor managing individual client accounts. All shares represented in the 13G are held in accounts owned by the clients of Financial & Investment Management Group, Ltd and Financial & Investment Management Group, Ltd disclaims beneficial ownership of the shares.

Stock Ownership of Directors and Executive Officers.

The following table sets forth certain information regarding the beneficial ownership of Common Stock as of May 15, 2006, by (i) each director, (ii) the current executive officers of the Company, (iii) other persons named in the Summary Compensation Table below, and (iv) all such persons as a group:

		Number off	Percent of
Name and Address		Shares Owned	Outstanding Shares
Non-Employee Directors:
	R. Keith Long	375,270 (2)(5)	3.81%
	John D. Barnett	3,960 (5)	*
	Patrick E. Falconio	5,751 (5)	*
	Richard H. Gudeman	2,222(5)	*
	Robert A. Nikels	1,306(5)	*
	Lonnie L. Steffen	2,745(5)	*
	Kenneth J. Shifrin	2,745 (4)(5)	*
	Eugene J. Woznicki	4,222(5)	*
Current Executive Officers:
	Vincent L. Kasch	510 (3)	*
	Michael P. Hydanus	-	-
Other Persons Named in Summary Compensation Table:
	J. Bruce Boisture	736 (3)	*
	Theodore A. Fleron	20,233 (1)(3)	*
	Eugene E. Payne	13,600	*
	Thomas C. Richmond	4,668	*
	George M. Wise, III	580(3)	*
Directors, executive officers and
	other persons as a group (18 persons)	447,266	4.54%

* Less than 1%.

The business address of each officer and director is c/o Financial Industries Corporation, 6500 River Place Blvd., Building I, Austin, Texas 78730.

(1) Includes shares beneficially acquired through participation in the Company’s 401K plan and/or the Employee Stock Purchase Plan, which are group plans for eligible employees.

(2) Mr. Long is the president and controlling shareholder of Otter Creek Management, Inc. Otter Creek Management, Inc. is an investment advisory firm that manages the following investment funds: Otter Creek Partners I, LP, a limited partnership

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(of which Otter Creek Management, Inc. serves as general partner); Otter Creek International, Ltd, an investment corporation; and HHMI XIII, a limited liability company. The shares in the table include 232,741 shares owned by Otter Creek International, Ltd Corporation and 136,778 shares owned by Otter Creek Partners I, LP Partnership. Mr. Long disclaims beneficial ownership of these shares for purposes of Section 16 of the Securities Exchange Act of 1934 or for any other purpose.

(3)) Owned in 401(k) plan account, subject to vesting, as a result of employer matching contribution program.

(4) Does not include 385,000 shares owned by American Physicians Service Group, Inc., of which Mr. Shifrin is CEO and Chairman. Mr. Shifrin disclaims beneficial ownership of such shares.

(5) Includes shares issued under the Stock Plan, effective September 30, 2005. For additional information, see the section entitled “Compensation of Directors.”;

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

New Era Transactions

In June 2003, a subsidiary of FIC acquired three companies: Total Compensation Group Consulting Inc., a consulting firm and registered investment advisor; Paragon, a group of three companies providing employee benefits products and services; and JNT Group Inc., an independent fee-based third-party administrator (collectively, the “New Era Marketing Companies”). The acquisitions were facilitated for FIC by representatives of American Physicians Service Group Inc. (“APS”) and Equita Financial and Insurance Services of Texas, Inc. Kenneth S. Shifrin, a director of FIC, is the chairman and chief executive officer of APS.

Pursuant to Option Agreements dated as of June 5, 2003 (the “Option Agreements”), in consideration for their facilitation of the acquisition of the New Era Marketing Companies and the Marketing Agreement described below, APS and Equita were granted options to purchase 323,000 and 169,000 shares of Common Stock, respectively, at $16.42 per share (120% of the average closing price of Common Stock for the 15 trading days ended June 3, 2003). Such options are exercisable only if a marketing subsidiary, FIC Financial Services Inc., produced over $200,000,000 in qualifying premiums between July 1, 2003, and December 31, 2005. Equita was also granted an option to purchase up to 158,000 shares of Common Stock at $16.42 per share, exercisable at the rate of 10,000 shares for each $10,000,000 increment by which qualifying premiums generated by products marketed by Equita exceeded $200,000,000 between July 1, 2003 and December 31, 2005. As of June 1, 2005, there have been no “qualifying premiums”, as described in “Part I, Item 1-Description of the Business-Agency Operations-Marketing Agreement with Equita.”;

In accordance with the terms of the Option Agreements, the Company appointed Mr. Shifrin and Eugene J. Woznicki, designees of APS and Equita, respectively, to the Board to fill the two vacancies created by the resignation of Roy Mitte and his son, Scott Mitte in 2003. See “Settlement of Litigation with Mitte Family”, below. In addition, the Company agreed, with respect to the 2003 Annual Meeting and its 2004 Annual Meeting, to propose Messrs. Shifrin and Woznicki as nominees for election to the Board, include their names in the Company’s proxy materials, and recommend and solicit proxies for their election. Under that agreement, in the event that the Company’s designated proxies cumulated votes for any director nominees, such proxies were obligated to cumulate votes in favor of Mr. Shifrin if such cumulative voting would result in the election of at least four directors and in favor of Mr. Woznicki if such cumulative voting would result in the election of at least eight directors. Such cumulative voting in favor of Mr. Shifrin occurred with respect to the 2003 Annual Meeting.

Pursuant to Stock Purchase Agreements dated as of June 5, 2003, APS and an affiliate of Equita acquired 312,484 and 204,918 shares of Common Stock, respectively, from the Mitte Foundation. In addition, APS acquired an additional 27,395 shares of Common Stock from FIC for a cash purchase price of $14.64 per share on June 5, 2003. Pursuant to a Registration Rights Agreement dated as of June 5, 2003, the Company granted registration rights to APS and Equita for all shares of Common Stock held by them on June 5, 2003, and any shares of Common Stock acquired pursuant to the Option Agreements.

In June 2005, Equita commenced litigation against FIC pertaining to matters arising out of the option agreement. See Item 3-Legal Proceedings-Litigation with Equita Financial and Insurance Services of Texas, Inc. and M&W Insurance Services, Inc.

Sale of Actuarial Risk Consultants, Inc. and Amendment to Employment Agreement of George Wise

On December 31, 2003, FIC sold Actuarial Risk Consultants, Inc. (“ARC”), an actuarial consulting subsidiary which it had established in December, 2002. The sale of ARC was to George M. Wise, III, who was Vice President and Chief Financial Officer of FIC until March 2004. The consideration for the transaction was $10,000. Prior to the closing, all intercompany payables owed by ARC to FIC or its affiliates were satisfied in full, and certain tangible and intangible assets used by ARC in

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connection with the operation of its business were assigned to ARC. The cost to the Company of its investment in ARC at the time of the sale was $146,000.

In connection with the sale, Mr. Wise and FIC entered into an amendment to Mr. Wise’s employment agreement, as described under “Compensation of Executive Officers and Directors–Employment Agreements and Change In Control Arrangements”. The amendment released FIC from any claims Mr. Wise may have had relating to his employment with FIC, including claims which Mr. Wise had asserted related to his entitlement to a bonus payment of approximately $70,000.

Also, in connection with the sale of ARC to Mr. Wise, FIC entered into a consulting agreement with ARC. Under the terms of the agreement, FIC and its insurance subsidiaries may (but are not obligated to) obtain up to 2,000 hours of actuarial consulting services from ARC during the period from January 1, 2004 to December 31, 2005. During 2004 and 2005, the Company paid fees of approximately $1.16 million and $0.84 million, respectively to ARC in connection with the provision of actuarial consulting services, including services related to the Company’s review of deferred policy acquisition costs and present value of future profits of acquired businesses.

Settlement of Litigation with Mitte Family

In October 2002, a Special Committee of the Company’s Board of Directors voted to terminate the employment agreement of Roy F. Mitte, the Company’s Chairman and Chief Executive Officer, by reason of Mr. Mitte’s physical or mental disability extending over a period of six consecutive months or more. The Special Committee further voted to terminate Mr. Mitte’s employment agreement on the alternative basis that the actions of Mr. Mitte, as described in the Report of the Audit Committee of the Board of Directors Concerning Payment of Personal Expenses of the Chairman, dated September 17, 2002 (the “Audit Committee Report”), constituted breaches of such agreement that excused further performance thereof by FIC.

The Audit Committee, which at the time consisted of John D. Barnett, David G. Caldwell, W. Lewis Gilcrease and Frank Parker, found that over the course of almost ten years, the Company had paid, or reimbursed Mr. Mitte for, approximately $550,000 in expenses that were personal in nature. The Audit Committee further noted that in January 2002, Mr. Mitte caused the transfer of $1,000,000 from the Company to the Roy F. and Joann Cole Mitte Foundation (the “Mitte Foundation”), a charitable foundation controlled by Mr. Mitte, in contravention of his earlier statement to the Compensation Committee of the Board that no donation would be made from FIC to the Mitte Foundation during 2002, and without the prior approval of the Board.

On January 23, 2003, the Company commenced litigation against Mr. Mitte, the Mitte Foundation, and Joann Cole Mitte which sought repayment of the personal expenses and donation and to delay a special shareholders meeting previously requested by the Mitte Foundation, alleging, among other things, Mr. Mitte’s violation of certain provisions of the securities laws. On March 19, 2003, Mr. Mitte filed a counterclaim against the Company alleging breach of contract with respect to the Company’s failure to pay Mr. Mitte severance benefits and compensation that Mr. Mitte claimed he was entitled to receive under his employment agreement with the Company. Mr. Mitte sought actual damages, interest and attorney’s fees and costs. He claimed the actual damages were incurred with respect to the Company’s termination of his employment agreement, which provided a minimum level of compensation of $503,500 per year through February 25, 2007, and an annual bonus through February 25, 2007, in the discretion of the Board, of $2.5 million which would be automatically payable in the event of a change of control of the Company.

On May 15, 2003, the Company entered into a Settlement Agreement with the Mitte Family. Under the terms of the Settlement Agreement, the Mitte Family released the Company from any past, present or future claims which they may have against the Company, including any claims which Roy Mitte may assert under the employment agreement. In addition, the Company agreed to release the Mitte Family from any past, present or future claims which the Company may have against the Mitte Family.

The Settlement Agreement provided for payments by the Company to Roy Mitte of $1 million on each of June 1, 2003, June 1, 2004 and June 1, 2005, which would be subject to acceleration in the event of specified changes in control of the Company. Pursuant to the Settlement Agreement, the Company also agreed to:

• use its commercially reasonable efforts to locate a purchaser or purchasers of specified installments over a two year period of the 1,552,206 shares of Company common stock owned by the Mitte Foundation as of the date of the Settlement Agreement during future periods set forth in the Settlement Agreement, at a price of $14.64 per share;

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• purchase (or, alternatively, locate a purchaser) on or before June 1, 2003, of the 39,820 shares of Common Stock owned by Roy Mitte and the 35,520 shares of Common Stock held in the ESOP account of Roy Mitte, in each case as of the date of the Settlement Agreement, at a price of $14.64 per share; and

• cancel options to purchase 6,600 shares of Common Stock held by Roy Mitte in exchange for a cash payment equal to $42,636 (the difference between $14.64 per share and the exercise price per share).

Pursuant to the Settlement Agreement, the Mitte Family granted an irrevocable proxy for any shares of Common Stock owned by the Mitte Foundation to the persons named as proxies by the Company. With respect to the 2003 and later Annual Meetings of the Company, the proxy may be voted “for” all nominees of the Board named in the Company’s proxy statements, “against” any proposal by a person other than the Company for the removal of any members of the Board, “withheld” as to nominees for the Board proposed by any person other than the Company, “against” any proposal by any person other than the Company to amend the bylaws or articles of the Company, and in accordance with the recommendation of the Board or at their discretion as permitted by applicable law with respect to any shareholder proposal submitted pursuant to Rule 14a-8 under the Exchange Act. The proxy also extended to certain matters which may be proposed by the Company at its 2004 annual meeting of shareholders, or any later annual or special meeting, regarding changes in the ownership percentage required in order for a shareholder to call a special meeting of shareholders and the elimination of cumulative voting. The Company agreed not to propose at the 2003 Annual Meeting any amendment to the Company’s articles of incorporation or bylaws that would increase the ownership threshold for a shareholder’s ability to call a special meeting of shareholders. The proxy did not extend to any other matters that may be proposed by FIC at any annual or special meeting during which the proxy is in effect, including, without limitation, any other amendment to the articles of incorporation or bylaws of the Company, any action relative to a merger of FIC, the sale of all or substantially all of the assets of FIC or the issuance or sale by FIC of any of its equity securities.

The survival of the proxy was generally conditioned upon the performance of the scheduled purchases of the shares of Common Stock owned by the Mitte Foundation and payments required under the Settlement Agreement. The Settlement Agreement provided that, unless earlier terminated, the proxy would expire on May 15, 2005. Accordingly, the proxy granted under the terms of the Settlement Agreement has expired by its own terms.

As described under “New Era Transactions”, above, APS and a subsidiary of Equita acquired 312,484 and 204,918 shares of Common Stock, respectively, from the Mitte Foundation in June 2003. Prior to the 2003 Annual Meeting, at the request of APS and the Equita subsidiary, FIC released the proxy with respect to the shares of Common Stock of FIC acquired from the Foundation. Accordingly, APS and the Equita subsidiary each voted their respective shares directly at the 2003 Annual Meeting.

In May 2003, the Company purchased from Mr. Mitte the 39,820 shares of FIC common stock owned by him and the 35,520 shares of common stock held in Mr. Mitte’s ESOP account, as provided under the terms of the Settlement Agreement, at a price of $14.64 per share. Subsequently, in July 2003, the Company’s Nonqualified Deferred Compensation Plan f/b/o Eugene E. Payne purchased, at the request of Dr. Payne, 13,600 of these shares, at a price of $14.64 per share. The benefits available to Dr. Payne under the plan are based on the value of these shares, as well as the value of other assets held in the plan.

The Settlement Agreement also includes provisions related to the continuation of health insurance of Roy Mitte and Joann Mitte for five years. In accordance with the Settlement Agreement, Roy Mitte and Scott Mitte resigned from the Board effective as of June 2, 2003. The Company recognized a charge of $2.9 million (before tax) in the first quarter of 2003 for amounts to be paid under the Settlement Agreement.

Litigation with Otter Creek Partnership I, L.P.

On June 13, 2003, Otter Creek Partnership I, L.P. filed a civil lawsuit against FIC in the District Court in Travis County, Texas, Cause No. GN302872. In its lawsuit, Otter Creek sought an injunction against FIC to compel it to schedule and hold the 2003 annual meeting of shareholders. In addition, the lawsuit sought to compel FIC either not to exercise the proxy that it acquired from the Mitte Family (as described above) or to vote such shares in the same proportion as the other outstanding shares of the Company are voted. Otter Creek and FIC completed a settlement with respect to the lawsuit in December 2003. Under the settlement agreement, (1) the Company reimbursed Otter Creek for $250,000 in proxy expenses, and (2) an additional $475,000 of proxy and litigation expenses will be submitted to the Company’s shareholders for approval at the next Annual Meeting. The Board of Directors agreed to recommend that shareholders approve the reimbursement. The settlement also included mutual releases between the Company and Otter Creek and its affiliates in favor of each of them and their respective employees, directors, officers, agents, and representatives. The Chairman of the Board of Directors of the Company, R. Keith Long, is the President and owner of the General Partner of Otter Creek Partners I, L.P.

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Consulting Arrangement with William P. Tedrow

William P. Tedrow, who served as a vice president of the Company from June 2003 to March 2004, provided consulting services to the Company during the period from January 2003 to May 2003. These services related to the development of the business plan that led, in June 2003, to the purchase of the New Era companies and the marketing arrangement with Equita. In connection with such consulting services, Mr. Tedrow received fees of $94,361 and reimbursement of expenses in the amount of $8,925.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the dollar amount of the fees incurred through September 30, 2006 to the Company by PricewaterhouseCoopers LLP (“PwC”) for audit and other services for the years 2003 and 2004 and by Deloitte & Touche LLP (“Deloitte”) for audit and other services for the year 2004:

	For the Audit of
	Year Ended December 31,
	2004		2003
	Deloitte	PwC	PwC
Audit fees	$3,244,019	$     47,464	$5,204,672
Audit-related fees	317,195	68,054	256,122
Tax fees	-	-	234,117
All other fees	-	-	-
Total fees billed	$3,561,214	$   115,518	$5,694,911

Audit fees represent fees for services provided in connection with the audit of the Company’s consolidated statements, review of interim financial statements, statutory audits, and SEC registration statement reviews.

Audit-related feesconsist primarily of fees for audits of employee benefit plans and services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements. This category includes fees related to audit and attest services not required by statute or regulations, and consultations concerning financial accounting and reporting standards.

Tax feesconsist of fees for professional services for tax compliance, tax advice, tax planning and tax audits. These services include assistance regarding federal and state tax compliance, return preparation, claims for refunds and tax audits.

The Audit Committee considers and, if it deems appropriate, approves, on a case by case basis, any audit or permitted non-audit service to be performed by the independent auditor at the time that the independent auditor is to be engaged to perform such service. These services may include audit services, audit-related services, tax services and other services. Since the Audit Committee specifically pre-approves each of the services to be rendered by the independent auditor in advance of performance, the Audit Committee currently does not have a pre-approval policy. In connection with the approval of audit and non-audit services, the Audit Committee must consider whether the provision of such permitted non-audit services is consistent with maintaining the independent auditor’s status as our independent auditors. Since May 6, 2003, the date on which SEC rules relating to approval of services by independent auditors became effective, all services for which the Audit Committee engaged the independent auditor were pre-approved by the Audit Committee.

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PART IV

ITEM 15. EXHIBITS, FINANICAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

1. Financial Statements (See Item 8)

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

Reports of Independent Registered Public Accounting Firms.

Consolidated Balance Sheets, December 31, 2004 and 2003 (Restated).

Consolidated Statements of Operations, for the years ended December 31, 2004, 2003 (Restated), and 2002 (Restated).

Consolidated Statements of Changes in Shareholders' Equity, for the years ended December 31, 2004, 2003 (Restated), and 2002 (Restated).       

Consolidated Statements of Cash Flows, for the years ended December 31, 2004, 2003 (Restated), and 2002 (Restated).

Notes to Consolidated Financial Statements (Restated).

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

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

Schedule II - Condensed Financial Statements of Registrant (Restated).

Schedule III – Supplementary Insurance Information (Restated).

Schedule IV – Reinsurance (Restated).

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

3. Exhibits filed with this report or incorporated herein by reference are as listed in the Index to Exhibits beginning on Page 71.

(b) Reports on Form 8-K

Registrant filed the following reports on Form 8-K during the fourth quarter of 2004:

(i) On October 13, 2004, the Registrant filed a Current Report on Form 8-K. The current report referred to a press release issued October 13, 2004 by the Company, which announced the resignation of Charles B. Cooper as Chief Operating Officer effective December 31, 2004. The report also announced that the Company would begin an immediate search of a replacement for Mr. Cooper.

(ii) On November 4, 2004, the Registrant filed a Current Report on Form 8-K.  The current report disclosed that Charles B. Cooper has submitted his resignation as Chief Operating Officer effective November 1, 2004, based on a request by the Board of Directors.  Mr. Cooper had previously submitted his resignation to be effective December 31, 2004. 

(c) Exhibits

The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Exhibit Index of this Annual Report on Form 10-K. 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Financial Industries Corporation

(Registrant)

By: /s/ Michael P. Hydanus   By: /s/ Vincent L. Kasch  

Michael P. Hydanus, Interim President and Vincent L. Kasch, Chief Financial Officer,

Chief Executive Officer (Principal Accounting and Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on October 27, 2006.

_/s/ R. Keith Long___________   __/s/ Richard H. Gudeman________

R. KEITH LONG, CHAIRMAN RICHARD H. GUDEMAN, DIRECTOR

__/s/ John Barnett_______________________ __/s/ Kenneth Shifrin____________________

JOHN BARNETT, DIRECTOR KENNETH SHIFRIN, DIRECTOR

__/s/ Robert A. Nikels __________________ __/s/ Lonnie Steffen_____________________

ROBERT A. NIKELS, DIRECTOR LONNIE STEFFEN, DIRECTOR

__/s/ Eugene Woznicki____________

EUGENE WOZNICKI, DIRECTOR

__/s/ Patrick E. Falconio_______________

PATRICK E. FALCONIO, DIRECTOR

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EXHIBIT INDEX

Exhibit No.	Description of Exhibit
2.1	Agreement and Plan of Merger dated as of January 18, 2001, by and among FIC, InterContinental Life and ILCO Acquisition Corp. (1)
3.1	Articles of Incorporation of FIC (2)
3.2	Certificate of Amendment to the Articles of Incorporation of FIC, dated November 12, 1996 (3)
3.3	Bylaws of FIC (2)
3.4	Amendment to Bylaws of FIC dated February 29, 1992 (8)
3.5	Amendment to Bylaws of FIC dated June 16, 1992 (8)
3.6	Amendment to Articles of Incorporation of FIC dated May 18, 2001 (10)
4.1	Indenture Agreement between FIC and Wilmington Trust Company, as trustee, pertaining to the issuance by FIC of the Floating Rate Senior Debt Securities due 2033 (15)
10.01	Option Agreement, dated as of June 12, 1991, among FIC, Investors Life Insurance Company of North America and Investors Life Insurance Company of California (4)
10.02	Note, dated July 30, 1993, in the original principal amount of $30 million made by Family Life Corporation in favor of Investors Life Insurance Company of North America (5)
10.03	Note, dated July 30, 1993, in the original principal amount of $4.5 million made by Family Life Insurance Investment Company in favor of Investors Life Insurance Company of North America (5)
10.04	Amendment No. 1, dated December 12, 1996, effective June 12, 1996, to the note dated July 30, 1993 in the original principal amount of $30 million made by Family Life Corporation in favor of Investors Life Insurance Company of North America (6)
10.05	Amendment No. 1, dated December 12, 1996, effective June 12, 1996, to the note dated July 30, 1993 in the original principal amount of $4.5 million made by Family Life Insurance Investment Company in favor of Investors Life Insurance Company of North America (6)
10.06	Amendment Agreement, dated December 12, 1996, amending the Option Agreement among FIC, Investors Life Insurance Company of North America and Investors Life Insurance Company of California (6)
10.07	Assignment Agreement, dated December 23, 1998, between Family Life Insurance Investment Company and FIC (7)
10.08	Amendment dated as of April 4, 2001 to Employment Agreement between the Registrant and Roy F. Mitte (9)
10.09	Amended and Restated Stock Option Grant Agreement (10)
10.10	Employment Agreement between Registrant and Jeffrey H. Demgen dated as of May 1, 2002 and ratified by the Board of Directors on August 17, 2002, as amended on August 19, 2002 (11)
10.11	Employment Agreement between Registrant and Thomas C. Richmond dated as of May 1, 2002 and ratified by the Board of Directors on August 17, 2002 (11)
10.12	Employment Agreement between Registrant and Theodore A. Fleron dated as of March 22, 2002 and ratified by the Board of Directors on August 17, 2002 (11)
10.13	Employment Agreement between Registrant and Dr. Eugene E. Payne dated as of November 4, 2002 and ratified by the Board of Directors on November 4, 2002 (12)
10.14	Financial Industries Corporation Equity Incentive Plan, dated November 4, 2002 (12)
10.15	Employment Agreement between Registrant and George M. Wise, III dated as of December 13, 2002 and ratified by the Board of Directors on December 13, 2002 (13)
10.16	Employment Agreement between Registrant and Theodore A. Fleron dated as of December 13, 2002 and ratified by the Board of Directors on December 13, 2002, superceding Exhibit 10.12 (13)
10.17	Employment Agreement between Registrant and Thomas C. Richmond dated as of December 13, 2002 and ratified by the Board of Directors on December 13, 2002, superceding Exhibit 10.11 (13)
10.18	Compromise Settlement Agreement and Mutual Release in the litigation entitled Financial Industries Corporation v. The Roy F. and Joann Cole Mitte Foundation, Roy F. Mitte, and Joann Cole Mitte, Civil Action No. A03 CA 033 SS, in the United States District Court for the Western District of Texas, Austin Division (14)
10.19	Stock Purchase Agreement, by and among Total Compensation Group Consulting, Inc., John Pesce, Mike Cochran, Arthur A. Howard, Geoffrey Calaway, W.M. Hartman, Edward F. Harman, III, M.B. Donaldson, Teri Hoyt, Alycia Andrews, Charles Francis, Tom Cook, David Allen, and Marcus Smith and Financial Industries Corporation, and FIC Financial Services, Inc. (15)
10.20	Stock Purchase Agreement by and among JNT Group, Inc., Earl W. Johnson and Total Compensation Group Consulting, Inc., FIC, and FIC Financial Services, Inc. (15)

85

10.21	Stock Purchase Agreement by and among Paragon Benefits, Inc., The Paragon Group, Inc., Paragon National, Inc., Scott A. Bell, Wayne C. Desselle, and Chris Murphy and FIC, and FIC Financial Services, Inc.(15)
10.22	Marketing Agreement by and among Investors Life Insurance Company of North America, Family Life Insurance Company and Equita Financial and Insurance Services of Texas, Inc. (15)
10.23	Stock Purchase and Option Agreement by and between FIC and American Physicians Service Group, Inc. (15)
10.24	Stock Option Agreement by and among FIC, Equita Financial and Insurance Services of Texas, Inc., and, solely for purposes of Section 4.5 of the agreement, M&W Insurance Services, Inc. (15)
10.25	Registration Rights Agreement by and among FIC, American Physicians Service Group, Inc., M&W Insurance Services, Inc., Equita Financial and Insurance Services of Texas, Inc. (15)
10.26	Stock Option Agreement between FIC and William P. Tedrow (15)
10.27	Senior Notes Subscription Agreement between FIC and InCapS Funding I, Ltd. (15)
10.28	Placement Agreement with Sandler O’Neill & Partners, L.P., as agent of FIC, with respect to the issue and sale by FIC and the placement by Sandler O’Neill & Partners, L.P. of $15,000,000 aggregate principal amount of Floating Rate Senior Notes of FIC (15)
10.29	Amendment No. 1 to Employment Agreement of Eugene E. Payne, dated as of October 9, 2003 (16)
10.30	Stock Purchase Agreement dated December 31, 2003, by and between BCDP Holdings, LLP, Financial Industries Corporation and FIC Financial Services, Inc. (17)
10.31	Acquisition Agreement dated December  31, 2003, by and between  InterContinental Life Corporation and George M. Wise, III (17)
10.32	Agreement and Release dated December 31, 2003, by and between Scott A. Bell, FIC Financial Services, Inc., and Financial Industries Corporation (17)
10.33	Agreement and Release dated December 31, 2003, by and between Mike Cochran, FIC Financial Services, Inc., and Financial Industries Corporation (17)
10.34	Agreement and Release dated December 31, 2003, by and between Wayne C. Desselle, FIC Financial Services, Inc., and Financial Industries Corporation (17)
10.35	Agreement and Release dated December 31, 2003, by and between Chris  Murphy, FIC Financial Services, Inc., and Financial Industries Corporation (17)
10.36	Agreement and Release dated December 31, 2003, by and between John Pesce, FIC  Financial Services, Inc., and Financial Industries Corporation (17)
10.37	Amendment No. 1 dated December 31,  2003, to Employment Agreement between George Wise and Financial Industries Corporation (17)
10.38	Consulting Agreement between Actuarial Risk Consultants, Inc. and Financial Industries Corporation (17)
10.39	Employment Agreement dated January 7, 2004 by and between Bruce Boisture and Financial Industries Corporation (18)
10.40	Amendment No. 1 to Employment Agreement between Financial Industries Corporation and Thomas C. Richmond dated as of February 13, 2004 (19)
10.41	Non-Qualified Deferred Compensation Plan (21)
10.42	Investment Management Agreement dated as of October 20, 2003 by and between, Investors Life Insurance Company of North America and Conning Asset Management Company  (21)
10.43	Investment Management Agreement dated as of October 20, 2003 by and between Family Life Insurance Company and Conning Asset Management Company (21)
10.44	Mutual Release dated as of July 30, 2004 between Eugene E. Payne and the Registrant. (21)
10.45	Letter Agreement dated as of April 5, 2004 between Jeffrey H. Demgen and the Registrant with respect to the termination of Mr. Demgen’s active employment.  (21)
10.46	Settlement Agreement in the litigation entitled Otter Creek Partnership I, L.P.v. Financial Industries Corporation, Civil Action No. GN302872 in the District Court, Travis County, Texas. (21)
10.47	Amendment No. 2, dated June 10, 2004, effective as of March 18, 2004, to the note dated July 30, 1993 in the original principal amount of $30 million made by Family Life Corporation in favor of Investors Life Insurance Company of North America   (21)
10.48	Amendment No. 2, dated June 10, 2003, effective as of March 18, 2004, to the note dated July 30, 1993, in the original principal amount of $4.5 million made by FIC in favor of Investors Life Insurance Company of North America   (21)
10.49	Agreement of Sale and Purchase dated as of March 17, 2005, between Investors Life Insurance Company of North America and Aspen Growth Properties, Inc. (21)

86

10.50	First Amendment to Agreement of Sale and Purchase dated as of June 1, 2005, between Investors Life Insurance Company of North America and Aspen Growth Properties, Inc. (21)
10.51	Lease Agreement dated as of June 1, 2005, between Investors Life Insurance Company of North America and River Place Pointe, L.P.  (21)
10.52	Employment Letter dated February 17, 2004 provided to Vincent L. Kasch (22)
10.53	Employment Letter dated  April 19, 2005 provided to Michael P. Hydanus regarding position of Chief Operating Officer (20)
10.54	Employment Agreement dated January 7, 2004 by and between Bruce Boisture and Financial Industries Corporation (23)
10.55	Severance Agreement dated September 27, 2005 by and between Bruce Boisture and Financial Industries Corporation (24)
10.56	Letter of Agreement effective January 12, 2006 by and between Vincent L. Kasch and Financial Industries Corporation regarding change of control (25)
10.57	Employment Letter dated January 1, 2006 provided to Michael P. Hydanus regarding position of Interim Chief Executive Officer (26)
10.58	Amendment No. 3, dated March 9, 2006, to the note dated July 30, 1993 in the original principal amount of $30 million made by Family Life Corporation in favor of Investors Life Insurance Company of North America*
10.59	Amendment No. 3, dated March 9, 2006, to the note dated July 30, 1993, in the original principal amount of $4.5 million made by FIC in favor of Investors Life Insurance Company of North America*
10.60	Consulting Agreement effective January 5, 2006 by and between Theodore A. Fleron and Financial Industries Corporation (27)
10.61	Form 8-K dated April 18, 2006 regarding non-reliance on previously issued financial statements (28)
10.62	Form 8-K dated June 9, 2006 regarding retainer of Keefe, Bruyette & Woods, Inc. effective June 9, 2006 (29)
10.63	Form 8-K dated July 18, 2005 regarding resignation of Sal Diaz-Verson as Director (30)
10.64	Form 8-K dated October 5, 2005 regarding appointment of Robert Nikels as Director (31)
10.65	FIC Stock Fee Plan for Non-Employee Directors, effective as of September 30, 2005 (33)
10.66	Defined Contribution SERP Plan effective January 1, 2005*
10.67	InterContinental Life Corporation Pension Restoration Plan For Rule Of 68 HCE’s, effective January 1, 2005*
10.68	Resolution to Terminate the InterContinental Life Corporation Defined Contribution Supplemental Executive Retirement Plan, dated December 20, 2005*
10.69	Resolution to Terminate the InterContinental Life Corporation Supplemental Executive Retirement Plan, also known as the Pension Restoration Plan For Rule Of 68 HCE’s, dated December 20, 2005*
14.1	Code of Ethics for Senior Executives and Financial Officers (21)
14.2	Business Ethics and Practices Policy (21)
16.1	Form 8-K dated September 14, 2005 regarding change of independent accountant (32)
21.1	Subsidiaries of the Registrant *
23.1	Consent of Independent Registered Public Accounting Firm *
23.2	Consent of Independent Registered Public Accounting Firm *
31.1	Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 *
31.2	Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 *
32.1	Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350 *
32.2	Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350 *
99.1	Form 8-K dated June 9, 2006 regarding the exploration of strategic alternatives (34)

* Filed herewith.

(1) Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated January 22, 2001.

(2) Incorporated by reference to the Exhibits filed with FIC’s Annual Report on Form 10-K for 1985.

(3) Incorporated by reference to the Exhibits filed with FIC’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.

(4) Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated June 25, 1991.

(5) Incorporated by reference to the Exhibits filed with FIC’s Annual Report on Form 10-K for 1993.

(6) Incorporated by reference to the Exhibits filed with FIC’s Annual Report on Form 10-K for 1996.

87

(7) Incorporated by reference to the Exhibits filed with FIC’s Annual Report on Form 10-K for 1998.

(8) Incorporated by reference to the Exhibits filed with FIC’s S-4 filed on February 1, 2001.

(9) Incorporated by reference to the Exhibits filed with FIC’s 10K/A filed on April 5, 2001.

(10) Incorporated by reference to the Exhibits filed with FIC’s Annual Report on Form 10-K for the year ended December 31, 2001.

(11) Incorporated by reference to the Exhibits filed with FIC’s Quarterly Report on Form 10-Q filed on August 26, 2002, for the six-month period ended June 30, 2002.

(12) Incorporated by reference to the Exhibits filed with FIC’s Quarterly Report on Form 10-Q filed on November 14, 2002, for the nine-month period ended September 30, 2002.

(13) Incorporated by reference to the Exhibits filed with FIC’s Annual Report on Form 10-K for the year ended December 31, 2002.

(14) Incorporated by reference to the Exhibits filed with FIC’s Quarterly Report on Form 10-Q /A filed on May 16, 2003 for the three-month period ended March 31, 2003.

(15)) Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated June 10, 2003.

(16) Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated October 29, 2003.

(17) Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated January 6, 2004. 

(18) Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated February 8, 2004.

(19) Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated February 16, 2004.

(20) Incorporated by reference to the Exhibit filed with FIC’s Current Report on Form 8-K dated May 6, 2004.

(21) Incorporated by reference to the Exhibits filed with FIC’s Annual Report on Form 10-K for the year ended December 31, 2003.

(22) Incorporated by reference to the Exhibit filed with FIC’s Current Report on Form 8-K dated May 4, 2004.

(23) Incorporated by reference to the Exhibit filed with FIC’s Current Report on Form 8-K dated January 8, 2004.

(24) Incorporated by reference to the Exhibit filed with FIC’s Current Report on Form 8-K dated October 3, 2005.

(25) Incorporated by reference to the Exhibit filed with FIC’s Current Report on Form 8-K dated January 18, 2006.

(26) Incorporated by reference to the Exhibit filed with FIC’s Current Report on Form 8-K dated January 13, 2006.

(27)Incorporated by reference to the Exhibit filed with FIC’s Current Report on Form 8-K dated January 6, 2006.

(28) Incorporated by reference to the Current Report on Form 8-K dated April 18, 2006.

(29) Incorporated by reference to the Current Report on Form 8-K dated June 9, 2006.

(30) Incorporated by reference to the Current Report on Form 8-K dated July 18, 2005.

(31) Incorporated by reference to the Current Report on Form 8-K dated October 5, 2005.

(32) Incorporated by reference to the Current Report on Form 8-K dated September 14, 2005.

(33) Incorporated by reference to the Current Report on Form 8-K dated September 30, 2005.

(34) Incorporated by reference to the Current Report on Form 8-K dated June 9, 2006.

88

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

FORM 10-K—ITEM 15(a) (1) and (2)

LIST OF FINANCIAL STATEMENTS

TABLE OF CONTENTS

(1) The following consolidated financial statements of Financial Industries Corporation and Subsidiaries are included in Item 8:
Reports of Independent Registered Public Accounting Firms	F-2
Consolidated Balance Sheets, December 31, 2004 and 2003 (Restated)	F-4
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 (Restated), 2002 (Restated)	F-6
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2004, 2003 (Restated), 2002 (Restated)	F-8
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 (Restated), 2002 (Restated)	F-11
Notes to Consolidated Financial Statements (Restated)	F-13
(2) The following consolidated financial statement schedules of Financial Industries Corporation and Subsidiaries are included:
Schedule I – Summary of Investments – Other Than Investments in Related Parties	F-62
Schedule II – Condensed Financial Information of Registrant (Restated)	F-63
Schedule III – Supplementary Insurance Information (Restated)	F-66
Schedule IV – Reinsurance (Restated)	F-67

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

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders of

Financial Industries Corporation

Austin, Texas

We have audited the accompanying consolidated balance sheet of Financial Industries Corporationand subsidiaries (the “Company”) as of December 31, 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended December 31, 2004.  Our audit also included the 2004 financial statement schedules listed in the Index at Item 15(a)(2).  These financial statements and financial statement schedules are the responsibility of the Company's management.  Our responsibility is to express an opinion on the financial statements and financial statement schedules 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 the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Financial Industries Corporation and subsidiaries as of December 31, 2004, and the results of their operations and their cash flows for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such 2004 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 were engaged to audit, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, and our report dated October 27, 2006 disclaimed an opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting because of a scope limitation and expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting because of material weaknesses and the effects of a scope limitation.

DELOITTE & TOUCHE LLP

Dallas, Texas

October 27, 2006

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Financial Industries Corporation and its subsidiaries at December 31, 2003, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the 2003 and 2002 financial statement schedules listed in the accompanying index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1, during 2002, the Company adopted Statement of Financial Accounting Standards No. 141, “Business Combinations.”

As discussed in Note 2, the Company has restated its previously issued consolidated financial statements and financial statement schedules for the years ended December 31, 2003 and 2002.

PricewaterhouseCoopers LLP

Dallas, Texas

July 29, 2005, except for the current period restatement described in

Note 2 as to which the date is October 19, 2006

F-3

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

			December 31,
				2003
			2004	Restated (1)
			(In thousands)
ASSETS
Investments:
	Fixed maturity securities held to maturity, at amortized cost (fair value of $19
		at December 31, 2003)	$                -	$             17
	Fixed maturity securities available for sale, at fair value (amortized cost of
		$500,701 and $557,285 at December 31, 2004 and 2003)	499,155	555,801
	Fixed maturity securities held for trading, at fair value		1,057	4,873
	Equity securities, at fair value (cost of $6,311 and $6,393 at December 31,
		2004 and 2003)	8,502	7,941
	Policy loans		39,855	42,452
	Investment real estate		76,580	76,712
	Real estate held for sale		589	968
	Short-term investments		62,514	-
Total investments			688,252	688,764
Cash and cash equivalents			52,044	82,436
Deferred policy acquisition costs			50,640	54,819
Present value of future profits of acquired business			17,905	21,096
Agency advances and other receivables, net of allowance for doubtful
	accounts of $3,334 and $3,011 at December 31, 2004 and 2003		10,539	10,241
Reinsurance receivables			36,912	39,978
Real estate held for use			13,559	13,870
Accrued investment income			5,652	6,695
Due premiums			2,045	2,362
Property and equipment, net			1,244	1,454
Other assets			2,089	6,058
Separate account assets			359,876	358,271
Total assets			$    1,240,757	$   1,286,044

⁽¹⁾ See Note 2.

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

F-4

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS, continued

		December 31,
			2003
		2004	Restated (1)
		(In thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Policy liabilities and contractholder deposit funds:
	Contractholder deposit funds	$     572,090	$     593,881
	Future policy benefits	160,175	169,244
	Other policy claims and benefits payable	12,939	13,693
Notes payable		15,000	15,000
Deferred federal income taxes		3,549	6,333
Other liabilities		29,585	25,313
Separate account liabilities		359,876	358,271
Total liabilities		1,153,214	1,181,735
Commitments and contingencies (Notes 12 and 14)
Shareholders’ equity:
Common stock, $.20 par value; 25,000,000 shares authorized in 2004 and 2003;
	12,516,841 shares issued in 2004 and 2003; 9,804,009
	and 9,791,024 shares outstanding in 2004 and 2003	2,504	2,504
Additional paid-in capital		70,398	70,391
Accumulated other comprehensive income (loss)		(4,667)	(2,121)
Retained earnings		42,650	56,988
Common treasury stock, at cost; 2,712,832 and 2,725,817 shares in 2004 and 2003		(23,342)	(23,453)
Total shareholders’ equity		87,543	104,309
Total liabilities and shareholders’ equity		$   1,240,757	$  1,286,044

⁽¹⁾ See Note 2.

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

F-5

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Year Ended December 31,
			2003	2002
		2004	Restated (1)	Restated (1)
		(In thousands)
Revenues:
	Premiums, net	$     23,283	$     31,057	$     38,672
	Earned insurance charges	41,809	40,316	41,859
	Net investment income	30,703	35,346	38,168
	Real estate income, net	1,808	2,367	2,870
	Net realized gains (losses) on investments	2,783	(403)	(2,805)
	Other	2,226	2,714	2,272
Total revenues		102,612	111,397	121,036
Benefits and expenses:
	Policyholder benefits and expenses	47,510	47,414	53,463
	Interest expense on contractholder deposit funds	23,156	25,814	30,267
	Amortization of deferred policy acquisition costs	10,479	9,774	11,013
	Amortization of present value of future profits of acquired business	3,198	4,464	4,246
	Operating expenses	34,176	41,492	34,573
	Litigation settlement (Note 14)	-	2,915	-
	Interest expense	864	485	-
Total benefits and expenses		119,383	132,358	133,562
Loss from continuing operations before federal income taxes,
	discontinued operations, and cumulative effect of change in
	accounting principle	(16,771)	(20,961)	(12,526)
Federal income tax benefit:
	Current	(943)	(1,613)	(59)
	Deferred	(1,261)	(1,898)	(3,462)
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	(14,567)	(17,450)	(9,005)
Discontinued operations		-	(6,133)	-
Loss before cumulative effect
	of change in accounting principle	(14,567)	(23,583)	(9,005)
Cumulative effect of change in accounting principle, net of taxes		229	-	4,140
Net loss		$    (14,338)	$    (23,583)	$     (4,865)

⁽¹⁾ See Note 2.

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

F-6

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS, continued

			Year Ended December 31,
				2003	2002
			2004	Restated (1)	Restated (1)
			(In thousands, except per share data)
Net loss per share:
Basic:
	Average weighted shares outstanding		9,796	9,667	9,555
	Basic earnings per share:
	Loss from continuing operations before discontinued operations
		and cumulative effective of change in accounting principle	$    (1.48)	$     (1.81)	$    (0.94)
	Discontinued operations		-	(0.63)	-
	Loss before cumulative effect
		of change in accounting principle	(1.48)	(2.44)	(0.94)
	Cumulative effect of change in accounting principle		0.02	-	0.43
	Net loss per share		$      (1.46)	$     (2.44)	$     (0.51)
Diluted:
	Common stock and common stock equivalents		9,796	9,667	9,555
	Diluted earnings per share:
	Loss from continuing operations before discontinued operations
		and cumulative effect of change in accounting principle	$     (1.48)	$     (1.81)	$     (0.94)
	Discontinued operations		-	(0.63)	-
	Loss before cumulative effect
		of change in accounting principle	(1.48)	(2.44)	(0.94)
	Cumulative effect of change in accounting principle		0.02	-	0.43
	Net loss per share		$     (1.46)	$     (2.44)	$      (0.51)

⁽¹⁾ See Note 2.

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

F-7

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

			Common Stock		Additional Paid-in
			Shares	Amount	Capital
			(In thousands, except per share data)
Balance at January 1, 2002, as previously reported			11,736	$          2,348	$      65,790
	Prior period adjustments		-	-	-
Balance at January 1, 2002, as restated (1)			11,736	2,348	65,790
Comprehensive income (loss):
	Net loss, as restated (1)
	Other comprehensive income (loss):
	Change in net unrealized gain on investments in
		fixed maturities available for sale, net of taxes
	Change in net unrealized appreciation of
		equity securities, net of taxes
	Minimum pension liability, net of taxes, as restated (1)
Total comprehensive income (loss), as restated (1)			-	-	-
Stock options exercised			120	24	1,244
Treasury stock purchased, as restated (1)
Treasury stock contributed to Company 401(k) Plan, as restated (1)					2
Stock based compensation
Cash dividends to shareholders ($0.28 per share)
Balance at December 31, 2002, as restated (1)			11,856	2,372	67,036
Comprehensive income (loss):
	Net loss, as restated (1)
	Other comprehensive income (loss):
	Change in net unrealized loss on investments in
		fixed maturities available for sale, net of taxes, as restated (1)
	Change in net unrealized appreciation of
		equity securities, net of taxes
	Minimum pension liability, net of taxes, as restated (1)
Total comprehensive income (loss), as restated (1)			-	-	-
Stock options exercised			661	132	2,833
Treasury stock purchased, net of sales, as restated (1)					269
Treasury stock contributed to Company 401(k) Plan, as restated (1)					15
Treasury stock distributed (Note 17), as restated (1)					238
Balance at December 31, 2003, as restated (1)			12,517	2,504	70,391
Comprehensive income (loss):
	Net loss
	Other comprehensive income (loss):
	Change in net unrealized loss on investments in
		fixed maturities available for sale, net of taxes
	Change in net unrealized appreciation of
		equity securities, net of taxes
	Minimum pension liability, net of taxes
Total comprehensive income (loss)			-	-	-
Treasury stock contributed to Company 401(k) Plan					7
Balance at December 31, 2004			12,517	$            2,504	$      70,398
(1) See Note 2

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

F-8

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY, continued

			Net Unrealized Appreciation (Depreciation) of Equity Securities	Net Unrealized Gain (Loss) on Fixed Maturities Available for Sale	Other	Total Accumulated Other Comprehensive Income (Loss)
			(In thousands, except per share data)
Balance at January 1, 2002, as previously reported			$          (373)	$          3,850	$  (1,235)	$       2,242
	Prior period adjustments		-	-	-	-
Balance at January 1, 2002, as restated (1)			(373)	3,850	(1,235)	2,242
Comprehensive income (loss):
	Net loss, as restated (1)
	Other comprehensive income (loss):
	Change in net unrealized gain on investments in
		fixed maturities available for sale, net of taxes		5,421		5,421
	Change in net unrealized appreciation of
		equity securities, net of taxes	353			353
	Minimum pension liability, net of taxes, as restated (1)				(397)	(397)
Total comprehensive income (loss), as restated (1)			353	5,421	(397)	5,377
Stock options exercised
Treasury stock purchased, as restated (1)
Treasury stock contributed to Company 401(k) Plan, as restated (1)
Stock based compensation
Cash dividends to shareholders ($0.28 per share)
Balance at December 31, 2002, as restated (1)			(20)	9,271	(1,632)	7,619
Comprehensive income (loss):
	Net loss, as restated (1)
	Other comprehensive income (loss):
	Change in net unrealized loss on investments in
		fixed maturities available for sale, net of taxes, as restated (1)		(10,524)		(10,524)
	Change in net unrealized appreciation of
		equity securities, net of taxes	1,043			1,043
	Minimum pension liability, net of taxes, as restated (1)				(259)	(259)
Total comprehensive income (loss), as restated (1)			1,043	(10,524)	(259)	(9,740)
Stock options exercised
Treasury stock purchased, net of sales, as restated (1)
Treasury stock contributed to Company 401(k) Plan, as restated (1)
Treasury stock distributed (Note 17), as restated (1)
Balance at December 31, 2003, as restated (1)			1,023	(1,253)	(1,891)	(2,121)
Comprehensive income (loss):
	Net loss
	Other comprehensive income (loss):
	Change in net unrealized loss on investments in
		fixed maturities available for sale, net of taxes		236		236
	Change in net unrealized appreciation of
		equity securities, net of taxes	423			423
	Minimum pension liability, net of taxes				(3,205)	(3,205)
Total comprehensive income (loss)			423	236	(3,205)	(2,546)
Treasury stock contributed to Company 401(k) Plan
Balance at December 31, 2004			$            1,446	$         (1,017)	$  (5,096)	$        (4,667)

⁽¹⁾ See Note 2

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

F-9

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY, continued

			Deferred Compensation	Retained Earnings	Treasury Stock	Total Shareholders’ Equity
			(In thousands, except per share data)
Balance at January 1, 2002, as previously reported			$     (292)	$      90,165	$(21,842)	$      138,411
	Prior period adjustments		-	(2,138)	-	(2,138)
Balance at January 1, 2002, as restated (1)			(292)	88,027	(21,842)	136,273
Comprehensive income (loss):
	Net loss, as restated (1)			(4,865)		(4,865)
	Other comprehensive income (loss):
	Change in net unrealized gain on investments in
		fixed maturities available for sale, net of taxes				5,421
	Change in net unrealized appreciation of
		equity securities, net of taxes				353
	Minimum pension liability, net of taxes, as restated (1)					(397)
Total comprehensive income (loss), as restated (1)			-	(4,865)	-	512
Stock options exercised						1,268
Treasury stock purchased, as restated (1)					(461)	(461)
Treasury stock contributed to Company 401(k) Plan, as restated (1)					96	98
Stock based compensation			292			292
Cash dividends to shareholders ($0.28 per share)				(2,591)		(2,591)
Balance at December 31, 2002, as restated (1)			-	80,571	(22,207)	135,391
Comprehensive income (loss):
	Net loss, as restated (1)			(23,583)		(23,583)
	Other comprehensive income (loss):
	Change in net unrealized loss on investments in
		fixed maturities available for sale, net of taxes, as restated (1)				(10,524)
	Change in net unrealized appreciation of
		equity securities, net of taxes				1,043
	Minimum pension liability, net of taxes, as restated (1)					(259)
Total comprehensive income (loss), as restated (1)			-	(23,583)	-	(33,323)
Stock options exercised						2,965
Treasury stock purchased, net of sales, as restated (1)					(1,768)	(1,499)
Treasury stock contributed to Company 401(k) Plan, as restated (1)					113	128
Treasury stock distributed (Note 17), as restated (1)					409	647
Balance at December 31, 2003, as restated (1)			-	56,988	(23,453)	104,309
Comprehensive income (loss):
	Net loss			(14,338)		(14,338)
	Other comprehensive income (loss):
	Change in net unrealized loss on investments in
		fixed maturities available for sale, net of taxes				236
	Change in net unrealized appreciation of
		equity securities, net of taxes				423
	Minimum pension liability, net of taxes					(3,205)
Total comprehensive income (loss)			-	(14,338)	-	(16,884)
Treasury stock contributed to Company 401(k) Plan					111	118
Balance at December 31, 2004			$              -	$        42,650	$(23,342)	$         87,543
(1) See Note 2

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

F-10

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

			Year Ended December 31,
				2003	2002
			2004	Restated (1)	Restated (1)
			(In thousands)
Cash flows from operating activities:
	Net loss		$(14,338)	$(23,583)	$(4,865)
	Adjustments to reconcile net loss to net cash provided by
		operating activities:
	Amortization of deferred policy acquisition costs		10,479	9,774	11,013
	Amortization of present value of future profits of acquired business		3,198	4,464	4,246
	Realized (gain) loss on investments		(2,783)	403	2,805
	Depreciation		3,148	3,363	2,882
	Cumulative effect of change in accounting principle		(229)	-	(4,140)
	Loss on sale of discontinued operations		-	4,935	-
	Changes in assets and liabilities:
		Decrease in accrued investment income	1,043	138	94
		Decrease (increase) in agency advances and other receivables	(298)	4,106	(1,487)
		Decrease in reinsurance receivables	3,066	2,005	5,355
		Decrease in due premiums	317	518	829
		Increase in deferred policy acquisition costs	(6,372)	(8,255)	(10,372)
		Decrease (increase) in other assets	3,969	6,489	(432)
		Increase (decrease) in policy liabilities and accruals	(216)	4,070	7,896
		Increase (decrease) in other liabilities	4,272	2,654	(3,178)
		Decrease in deferred federal income taxes	(1,146)	(2,229)	(1,763)
		Net activity from trading securities	3,815	(4,873)	-
		Other	(2,397)	1,806	1,630
Net cash provided by operating activities			5,528	5,785	10,513
Cash flows from investing activities:
	Fixed maturities purchased		(151,074)	(511,596)	(214,747)
	Real estate capital expenditures		(2,210)	(1,281)	(13,673)
	Proceeds from sales and maturities of fixed maturities		206,860	417,628	243,356
	Proceeds from sales of invested real estate		2,022	-	-
	Proceeds from payments received on mortgage loans		-	17	3,743
	Net (increase) decrease in short-term investments		(62,520)	126	47,682
	Net decrease in policy loans		2,597	2,557	3,436
	Acquisition of subsidiary companies, net of cash acquired		-	(4,124)	-
	Purchase of property and equipment		(426)	(480)	(1,128)
Net cash (used in) provided by investing activities			(4,751)	(97,153)	68,669

(continued)

⁽¹⁾ See Note 2.

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

F-11

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

		Year Ended December 31,
			2003	2002
		2004	Restated (1)	Restated (1)
		(In thousands)
Cash flows from financing activities:
	Cash dividends to shareholders	$               -	$       (480)	$    (2,021)
	Issuance of capital stock	-	1,383	1,007
	Contractholder fund deposits	39,292	57,458	55,341
	Contractholder fund withdrawals	(70,461)	(62,163)	(67,677)
	Proceeds from bank borrowings	-	15,000	-
	Purchase of treasury stock	-	(1,103)	(460)
	Sales of treasury stock	-	656	-
Net cash provided by (used in) financing activities		(31,169)	10,751	(13,810)
Net increase (decrease) in cash		(30,392)	(80,617)	65,372
Cash and cash equivalents, beginning of year		82,436	163,053	97,681
Cash and cash equivalents, end of year		$      52,044	$    82,436	$  163,053
Supplemental Cash Flow Disclosures:
	Income taxes (refunded) paid, net	$      (1,668)	$   (5,623)	$      3,335
	Interest paid	$         846	$       417	$             -

Supplemental Schedule of Non-Cash Investing Activities:

In June 2003, the Company purchased all of the capital stock of the New Era companies (as described in Note 17) for $4.2 million in cash and consideration in the form of restricted FIC common stock of $646,000. In conjunction with the acquisition, assets were acquired and liabilities were assumed as follows:

Estimated fair value of assets acquired $5.1 million.

Estimated fair value of liabilities assumed $0.2 million.

Dividends of $570,000 were declared but not paid in 2002.

⁽¹⁾ See Note 2.

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

F-12

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization and Nature of Business

Financial Industries Corporation (“FIC” or the “Company”) is principally engaged in marketing and underwriting individual life insurance and annuity products through its two life insurance subsidiaries. Family Life Insurance Company (“Family Life”) is licensed to sell annuity and life insurance products in 49 states and the District of Columbia as of December 31, 2004. Investors Life Insurance Company of North America (“Investors Life”) is licensed to sell individual life insurance and annuity products in 49 states, the District of Columbia, and the U.S. Virgin Islands as of December 31, 2004. Such products are marketed through both captive and independent agency systems. The Company also acquires and administers existing portfolios of individual life insurance and annuity products.

Other significant subsidiaries are: Family Life Corporation (“FLC”), FIC Realty Services, Inc. (“FIC Realty”), FIC Property Management, Inc. (“FIC Property”), FIC Financial Services, Inc., InterContinental Life Corporation (“ILCO”), Investors Life Insurance Company of Indiana (“Investors-IN”), ILG Securities Corporation, and ILG Sales Corporation.

ILCO, and its subsidiaries, including Investors Life, Investors-IN and ILG Sales Corporation, became wholly owned by the Company on May 18, 2001. Prior to that date, the Company’s investment in ILCO was reported using the equity method of accounting. On February 18, 2002, Investors-IN was merged into Investors Life with Investors Life as the surviving entity.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which differ from statutory accounting principles required by regulatory authorities for the Company’s insurance subsidiaries. The consolidated financial statements include the accounts of FIC and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated. The following accounting policies describe the accounting principles used in the preparation of the consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Significant estimates in the accompanying consolidated financial statements include (1) liabilities for policy benefits and claims, (2) valuation allowances for deferred tax assets, (3) valuation allowances for agency advances, (4) recoverability of deferred policy acquisition costs (“DAC”) and present value of future profits of acquired businesses (“PVFP”), and (5) impairment losses on fixed maturity securities and invested real estate.

Investments

Although the Company did experience significant turnover in fixed maturities in 2003 partially due to a portfolio restructure associated with a transition to a new investment manager, the Company’s general investment philosophy is to hold fixed maturities for long-term investment. However, fixed maturities may be sold prior to their maturity dates in response to changing market conditions, duration of liabilities, liquidity factors, interest rate movements and other investment factors. Accordingly, substantially all the Company’s fixed-maturity investments are classified as available for sale and are carried at fair value. Unrealized gains and losses on fixed maturities available for sale are not recognized in the consolidated statement of operations but are reported as a separate component of shareholders’ equity in accumulated other comprehensive income, net of effects on DAC and PVFP and related income taxes. However, if a decline in fair value is deemed to be other than temporary, the investment is reduced to its net realizable value and a realized loss is recorded in the consolidated statement of operations.

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. For mortgage-backed and asset-backed securities, the effective interest method is used based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The net investment in the securities is adjusted to the amount that would have existed had the new effective yield been applied at the time of acquisition. This adjustment is reflected

F-13

in net investment income.

Equity securities are classified as available for sale and are carried at fair value. Equity securities include investments in the Company’s own separate accounts, which are carried at estimated fair value. Unrealized gains and losses on equity securities are not recognized in the consolidated statement of operations but are reported as a separate component of shareholders’ equity in accumulated other comprehensive income, net of effects on other balance sheet accounts and related income taxes. If a decline in fair value is deemed to be other than temporary, the investment is reduced to its net realizable value and a realized loss is recorded in the consolidated statement of operations.

Fixed maturity securities held for trading are carried at fair value. Unrealized gains and losses on trading securities are recorded in the consolidated statement of operations.

Policy loans are recorded at unpaid balances, net of allowances for uncollectible accounts.

Short-term investments are carried at cost, which approximates fair value, and generally consist of those fixed maturities and other investments with maturities of less than one year from the date of purchase.

The Company monitors the performance of its real estate properties on an ongoing basis and identifies properties it intends to hold for investment and properties it intends to sell. Properties held for investment are classified as investment real estate and are stated at cost less accumulated depreciation. Depreciation is provided using straight-line methods over estimated useful lives of 5 to 40 years, or for leasehold improvements the minimum lease term if shorter. Real estate income is reported net of expenses incurred to operate the properties and depreciation expenses. The Company reviews its investment real estate properties on an on-going basis for impairment using a probability-weighted estimation of the expected net undiscounted future cash flows. If the expected net undiscounted future cash flows are less than the net book value of the property, the excess of the net book value over the Company’s estimate of fair value of the asset is recognized as a realized loss in the consolidated statement of operations and the new cost basis is depreciated over the property’s remaining life. Based on the application of the above policy, the Company has determined that no impairment is considered to exist with respect to its real estate held for investment as of December 31, 2004, and 2003.

Properties that are identified for sale and actively marketed by the Company are classified as real estate held for sale and are stated at the lower of cost less accumulated depreciation or net realizable value. No depreciation is recorded while the property is classified as held for sale. Net realizable value is determined by the Company based on the estimated selling price less direct costs of the sale.

Realized gains and losses on disposal of investments are included in the consolidated statement of operations. The cost of investments sold is determined on the specific identification basis, except for stocks, for which the first-in, first-out method is employed.

Cash and Cash Equivalents

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

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method over estimated useful lives of 3 to 8 years. Maintenance and repairs are charged to expense when incurred. Accumulated depreciation on property and equipment was $1,988,000 and $1,477,000 as of December 31, 2004 and 2003, respectively.

Deferred Policy Acquisition Costs

The cost of acquiring new business, principally first-year commissions and certain expenses of the policy issuance and underwriting departments, which vary with and are primarily related to the production of new business, have been deferred to the extent recoverable. Acquisition costs related to traditional life insurance products are deferred and amortized to expense using actuarial methods that include the same assumptions used to estimate future policy benefits. Acquisition costs related to interest-sensitive products are deferred and amortized in proportion to the estimated annual gross profits over the expected lives of the contracts. Loss recognition analysis with respect to deferred acquisition costs is evaluated periodically on an aggregate basis that combines deferred acquisition costs with the present value of future profits on acquired business.

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Present Value of Future Profits on Acquired Business

The present value of future profits of acquired traditional life business is amortized over the premium-paying period of the related policies in proportion to the estimated annual premium revenue applicable to such policies. Interest on the unamortized balance is accreted at rates from 4.4% to 11.0%.

For interest-sensitive products, these costs are amortized in relation to the expected gross profits of the policies. Retrospective adjustments of these amounts for interest sensitive products are made periodically along with a revision to the estimates of current or future gross profits to be realized from an acquired group of policies.

Loss recognition analysis with respect to present value of future profits is evaluated periodically on an aggregate basis that combines deferred acquisition costs with the present value of future profits on acquired business.

Real Estate Held for Use

Real estate held for use represents real estate occupied by the Company and is carried at cost less accumulated depreciation. Depreciation is provided using the straight-line method over estimated useful lives of 40 years. Accumulated depreciation on real estate occupied by the Company was $1,440,000 and $1,082,000 as of December 31, 2004 and 2003, respectively.

Other Assets

Other assets include the excess of cost over net assets acquired, or goodwill, totaling $752,000 at December 31, 2003. Such goodwill was recognized by ILCO in connection with its acquisitions, including Investors Life, and represents the Company’s carryforward interest using the equity method of accounting prior to the acquisition of ILCO on May 18, 2001.

Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company performs an annual test for impairment of the carrying value of goodwill. As a result of this analysis for 2004, goodwill was determined to be impaired as the carrying value of this asset exceeded its fair value. Accordingly, goodwill totaling $752,000 was written off in 2004 and recorded in operating expenses in the consolidated statement of operations.

Separate Accounts

Separate account assets and liabilities, carried at market value, represent policyholder funds maintained in accounts having specific investment objectives. The net investment income, gains, and losses of these accounts, less applicable contract charges, generally accrue directly to the policyholders and are not included in the Company’s consolidated statement of operations with the exception of the investment income attributed to the Company’s seed money in the separate accounts, which are included in net investment income. The Company’s seed money in the separate accounts is reported as equity securities in the accompanying consolidated balance sheets.

Solvency Laws Assessments

The solvency or guaranty laws of most states in which the Company’s insurance subsidiaries do business may require the Company’s insurance subsidiaries to pay assessments (up to certain prescribed limits) to fund policyholder losses or liabilities of insurance companies that become insolvent. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer’s financial strength, and in certain instances, may be offset against future premium taxes. The Company records the effect for guaranty fund assessments in the period such amounts are probable and can be reasonably estimated.

Policy Liabilities and Contractholder Deposit Funds

Liabilities for future policy benefits related to traditional life products are accrued as premium revenue is recognized. The liabilities are computed using the net level premium method, or an equivalent actuarial method. The investment yield assumption varies by calendar year and is based on Company experience and expectations. Expense assumptions and assumptions for withdrawals vary by product, issue age, and policy duration, and are based on Company experience and expectations. Assumptions for mortality are based upon industry experience as modified to reflect Company experience. Assumptions also reflect a provision for adverse deviation.

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

F-15

Excess of Net Assets Acquired Over Cost

The excess of net assets acquired over cost, or negative goodwill, was recognized in connection with the acquisition of ILCO. Prior to January 1, 2002, the excess of net assets acquired over cost was amortized in accordance with expected revenues of the related policies.During the first quarter of 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” SFAS No. 141 eliminates the practice of deferring and amortizing excess of fair value of net assets acquired over cost and requires unallocated negative goodwill to be recognized immediately. In accordance with SFAS No. 141, the unamortized negative goodwill balance of $4.1 million at January 1, 2002 resulting from the acquisition of ILCO was recognized as a cumulative effect of a change in accounting principle in the consolidated statement of operations.

Other Policy Claims and Benefits Payable

The liability for other policy claims and benefits payable represents management’s estimate of ultimate unpaid losses on claims and other miscellaneous liabilities to policyholders. Estimated unpaid losses on claims are comprised of losses on claims that have been reported but not yet paid and claims that have been incurred but not reported. Policy claims are based on case-basis estimates for reported claims, and on estimates, based on experience, for incurred but unreported claims and loss expenses.

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

Federal Income Taxes

The Company computes deferred income taxes utilizing the asset and liability method. Under this method, balance sheet amounts for deferred income taxes are computed based on the tax effect of the differences between the financial reporting and federal income tax bases of assets and liabilities using the tax rates which are expected to be in effect when these differences are anticipated to reverse.

The Company establishes a valuation allowance when management believes, based on the weight of the available evidence, that it is more likely than not that some portion of the deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon the Company’s generation of sufficient taxable income in the future to recover tax benefits that cannot be recovered from taxes paid in prior periods.

Revenue Recognition

Premiums on traditional life and health products are recognized as revenue when due. Benefits and expenses are associated with earned premiums, so as to result in recognition of net profits over the lives of the contracts.

Proceeds from annuity and universal life products are recorded as liabilities when received. Revenues for annuity and universal life products consist of net investment income, mortality charges, administration charges, and surrender charges.

Segment Information

Financial Accounting Standards Board (“FASB”) Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), requires disclosure of certain operating and financial data with respect to separate business activities within an enterprise. The Company’s primary business is the sale of individual life insurance and annuity products. The Company does not distinguish or group its consolidated operations by product type or geography. Management decisions regarding the allocation of resources and the assessment of performance are made on a number of different operational perspectives. The Company derives all significant revenues from a single reportable operating segment of the business, sales and administration of individual life insurance and annuity products. Accordingly, the Company does not report more than one segment.

Stock Option Plans and Other Equity Incentive Plans

The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related Interpretations in accounting for its stock option plans, which are described more fully in Note 11. No compensation cost has been recognized by the Company in the accompanying consolidated statements of operations for its stock option plans, with the exception of the amortization of deferred compensation costs related to the acquisition of ILCO. During 2002, the

F-16

remaining deferred compensation costs were amortized as the related stock options became fully vested in accordance with their original contractual terms.

The Company follows the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure.” SFAS No. 123 allows companies to follow existing accounting rules (APB 25) provided that pro forma disclosures are made of what net income and earnings per share would have been had the Company recognized expense for stock-based awards based on their fair value at date of grant. The fair value disclosure assumes that fair value of option grants were calculated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Options Granted in Year Ended December 31,
	2004	2003	2002
Expected dividend yield	–	–	1.00%
Expected volatility	–	–	0.37
Risk-free interest rate	–	–	2.23-2.72%
Expected holding period – years	–	–	1

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. Pro forma income information is detailed below:

		Year Ended December 31,
			2003	2002
		2004	Restated	Restated
		(In thousands, except per share data)
Net loss – as reported		$  (14,338)	$  (23,583)	$  (4,865)
Pro forma compensation expense, net of tax benefits		-	-	(560)
Net loss – pro forma		$  (14,338)	$  (23,583)	$  (5,425)
Net loss per share:
	Basic – as reported	$   (1.46)	$      (2.44)	$    (0.51)
	Diluted – as reported	$   (1.46)	$      (2.44)	$    (0.51)
	Basic – pro forma	$   (1.46)	$      (2.44)	$    (0.57)
	Diluted – pro forma	$   (1.46)	$      (2.44)	$    (0.57)

When stock appreciation rights are granted, the Company recognizes compensation expense equal to the amount by which the quoted market price of the Company’s common stock exceeds the exercise price at the measurement date. Compensation expense is accrued as a charge to expense over the period or periods the employee performs the related services. Compensation accrued during the service period is adjusted in subsequent periods up to the measurement date for changes, either increases or decreases, in the quoted market value of the shares of the enterprise’s stock covered by the grant, but shall not be adjusted below zero. The offsetting adjustment is made to compensation expense of the period in which changes in the market value occur.

Net Income (Loss) Per Share

Net income (loss) per share is calculated based on two methods: basic earnings (loss) per share and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised. The computation of diluted earnings (loss) per share does not assume conversion, exercise or contingent issuance of securities that would result in an increase in earnings per share amounts or a decrease in loss per share amounts (antidilution). Both methods are presented on the face of the accompanying consolidated statements of operations.

New Accounting Pronouncements

F-17

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS 123(R) is a revision of SFAS 123, “Accounting for Stock-Based Compensation,” which was originally issued by the FASB in 1995. As originally issued, SFAS 123 provided companies with the option to either record expense for share-based payments under a fair value model, or to simply disclose the impact of the expense. SFAS 123(R) requires companies to measure the cost of share-based payments to employees using a fair value model, and to recognize that cost over the relevant service period. In addition, SFAS 123(R) requires that an estimate of future award forfeitures be made at the grant date, while SFAS 123 permitted recognition of forfeitures on an as incurred basis. This statement is effective for all awards granted, modified, repurchased, or cancelled after June 15, 2005, and, as a result, the Company will adopt SFAS 123(R) beginning January 1, 2006. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46”). The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures.

In December 2003, the FASB issued Revised Interpretation No. 46, (“FIN 46R”). FIN 46R clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R clarifies how to identify a VIE and how to determine when a business enterprise should include the assets, liabilities, non-controlling interests, and results of activities of a VIE in its consolidated financial statements. FIN 46R also requires disclosure of certain information where the reporting company is the primary beneficiary or holds a significant variable interest in a VIE (but is not the primary beneficiary). FIN 46R was effective for public companies that have interests in VIEs or potential VIEs that are special-purpose entities for periods ending after December 15, 2003. Application by public companies for all other types of entities is required for periods ending after March 15, 2004. The adoption of FIN 46R did not affect FIC’s consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” for decisions made (1) as part of the FASB’s Derivatives Implementation Group process that effectively required amendments to SFAS No. 133, (2) in connection with other FASB projects dealing with financial instruments, and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not affect FIC’s consolidated financial statements.

In April 2003, the FASB issued SFAS No. 133 Implementation Issue No. B36, “Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor Under Those Instruments.” Implementation Issue No. B36 indicates that a modified coinsurance arrangement (“modco”), in which funds are withheld by the ceding insurer and a return on those withheld funds is paid based on the ceding company’s return on certain of its investments, generally contains an embedded derivative feature that is not clearly and closely related to the host contract and should be bifurcated in accordance with the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

The effective date of Implementation Issue No. B36 is the first day of the first fiscal quarter beginning after September 15, 2003. Beginning in the fourth quarter of 2003, FIC implemented the guidance prospectively for existing contracts and all future transactions. As permitted by SFAS No. 133, all contracts entered into prior to January 1, 1998, were grandfathered and are exempt from provisions of SFAS No. 133 that relate to embedded derivatives. Based upon FIC’s current modco reinsurance, the application of Implementation Issue No. B36 did not materially affect FIC’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a non-public entity. For financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption, transition is achieved by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value or other measurement attribute

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required by SFAS No. 150. As a result of further discussion by the FASB on October 8, 2003, the FASB clarified that minority interests in consolidated partnerships with specified finite lives should be reclassified as liabilities and presented at fair market value unless the interests are convertible into the equity of the parent. Fair market value adjustments occurring subsequent to July 1, 2003 would be recorded as a component of interest expense. At their October 29, 2003 meeting, the FASB agreed to indefinitely defer the implementation of a portion of SFAS No. 150 regarding the accounting treatment for minority interests in finite life partnerships. The provisions of SFAS No. 150, which FIC adopted in 2003, did not have a material impact on the Company’s consolidated financial statements.

In July 2003, the Accounting Standards Executive Committee (“AcSEC”) of the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 03-01, “Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts.” AcSEC developed the SOP to address the evolution of product designs since the issuance of SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” and 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” and the need for interpretive guidance to be developed in three areas: separate account presentation and valuation; the accounting recognition given sales inducements (bonus interest, bonus credits, persistency bonuses); and the classification and valuation of certain long-duration contract liabilities.

The Company adopted the provisions of SOP 03-01 at January 1, 2004, resulting in an increase to income as a cumulative effect of a change in accounting principle totaling $229,000, net of taxes, as reflected in the accompanying 2004 consolidated statement of operations. The Company has certain universal life insurance products that are credited with bonus interest after applicable qualifying periods. The adoption of the new accounting principle changed the pattern of recognition of the bonus interest expense.

In June 2004, the FASB issued FASB Staff Position (“FSP”) No. 97-1, “Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability.” FSP 97-1 clarifies the accounting for unearned revenue liabilities of certain universal-life type contracts under SOP 03-01. The Company’s adoption of FSP 97-1 did not have a material impact on the Company’s consolidated financial statements.

In March 2004, the EITF of the FASB reached a final consensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.” This Issue establishes impairment models for determining whether to record impairment losses associated with investments in certain equity and debt securities. It also requires income to be accrued on a level-yield basis following an impairment of debt securities, where reasonable estimates of the timing and amount of future cash flows can be made. In September 2004, the FASB issued 03-1-1, which defers the effective date of a substantial portion of EITF 03-1, from the third quarter of 2004, as originally required by the EITF, until such time as FASB issues further implementation guidance. In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP addresses the determination as to when an impairment in equity securities (including costs method investments) and debt securities that can contractually be prepaid or otherwise settled in such a way that the investor would not recover substantially all of its cost should be deemed other-than-temporary. This FSP nullifies certain requirements of EITF 03-1 and carries forward certain requirements and disclosures. The provisions of this FSP are to be applied to reporting periods beginning after December 15, 2005. Compliance with this FSP is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections – A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” This Statement changes the requirements for the accounting for and reporting of a change in accounting principle. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable.

This Statement also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS No. 154 carries forward without change the guidance contained in APB Opinion 20 for reporting the correction of an error in previously issued financial

F-19

statements and a change in accounting estimate. This statement is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005, with earlier adoption permitted. As a result, and due to the restatement included within the accompanying 2003 and 2002 consolidated financial statements, the Company adopted SFAS No. 154 for the correction of errors reported after December 31, 2005.

In September 2005, the American Institute of Certified Public Accountants (“AICPA”), issued Statement of Position (“SOP”) 05-01, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.” The SOP 05-01 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards (“SFAS”) 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and For Realized Gains and Losses from the Sale of Investments.” The SOP 05-01 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. The SOP 05-01 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company has not completed an assessment of the estimated impact of SOP 05-01 on its consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments.” This statement amends SFAS No. 133 and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The provisions of SFAS No. 155 (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 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 No. 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 No. 155 will be applied prospectively by the Company and is effective for all financial instruments acquired or issued for fiscal years beginning after September 15, 2006. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140” (“SFAS 156”). Among other requirements, SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations. SFAS 156 will be applied prospectively and is effective for fiscal years beginning after September 15, 2006. SFAS 156 is not expected to have a material impact on the Company's consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). 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, treatment of interest and penalties, and disclosure of such positions. FIN 48 will be applied prospectively and will be effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 and does not expect adoption to have a material impact on the Company's consolidated financial statements.

In September, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 will be applied prospectively and is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS 157 is not expected to have a material impact on the Company’s consolidated financial statements.

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”).  Under this new standard, companies must recognize a net liability or asset to report the funded status of their defined benefit pension and other postretirement benefit plans on their balance sheets.  The effective date of the recognition and disclosure provisions for calendar-year public companies is for calendar years ending after December 15, 2006.  The Company is currently evaluating the impact of this new standard but it is not expected to have a significant effect on the consolidated financial statements for the year ending December 31, 2006.

2. Restatement of Previously Issued Financial Statements

In the course of the Company’s work on its insurance company subsidiaries’ 2004 statutory financial statements, the Company

F-20

identified significant adjustments relating to 2003 and other prior periods. The Company determined that the accounting errors also affected its consolidated financial statements prepared in accordance with GAAP as included in its previously filed 2003 Form 10-K. Subsequent to this determination, the Company continued to work on the completion of its consolidated financial statements for 2004. This work resulted in the identification of additional adjustments affecting 2003 and prior years.

As a result, the Company has restated the accompanying consolidated financial statements for 2003 and 2002. The January 1, 2002 beginning retained earnings was also restated to correct errors occurring in the years prior to 2002. The restatement adjustments also affected previously reported unaudited quarterly financial data as presented in Note 19. These adjustments have been classified into the following areas:

Policy liabilities and Contractholder Deposit Funds – Following the filing of its 2003 Form 10-K, the Company engaged a new actuarial consulting firm to assist with the Company’s actuarial functions and the actuarial processes affecting financial statement preparation. The Company, along with the new firm, performed various reviews of the actuarial policy reserving process. Through this review, errors in the Company’s 2003 and prior year consolidated financial statements were identified relating to policy liabilities and contractholder deposit funds as described below.

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

Another significant adjustment related to contractholder deposit funds for annuity policies. Several annuity policies were misidentified in prior years as variable annuities and excluded from policy liabilities. Upon additional review, these policies have been appropriately identified as general account policies and included in the Company’s contractholder deposit fund liabilities.

As a result, corrected calculations and reserving processes for these policies were performed and the liability balances were increased for these corrections totaling $6.5 million, specifically, contractholder deposit funds totaling $4.8 million and future policy benefits totaling $1.7 million.

The Company also determined that there were errors in its process for calculating the liability for premiums received in advance related to policies processed on one of its policy administration systems. As a result, the Company developed a new program to correct the advance premium calculation process resulting in an increase to this liability of $365,000.

Various other errors were identified resulting in corrections primarily related to paid-up insurance coverages, manual policy processing, and accumulation of GAAP policy reserves and related reinsurance reserve credits. These resulted in an increase to reinsurance receivables of $291,000, with a reduction in future policy benefits of $17,000.

Reinsurance – As a result of the findings by a significant reinsurer and issues identified by the Company, the Company completed a comprehensive review of its reinsurance administrative systems. These systems generally rely on manual interface with the Company’s policy administration systems and general ledger. This manual interface, along with changes in retention policies which are based on covered individuals, resulted in errors in premiums ceded. As a result, restatement adjustments totaling $668,000 were made to appropriately cede premiums and reduce reinsurance receivables in accordance with the reinsurance agreements with various reinsurers.

Present Value of Future Profits of Acquired Businesses (PVFP) – The Company recorded a restatement adjustment totaling $56,000 for the amortization of PVFP in 2003 related to the correction of certain policy in-force data.

Excess of Net Assets Acquired Over Cost – In connection with the 2001 acquisition of ILCO, the Company allocated the purchase price to the fair value of the assets acquired and liabilities assumed in accordance with the purchase method of accounting resulting in the recognition of an excess of net assets acquired over cost, also referred to as negative goodwill. Prior to its acquisition of ILCO’s remaining outstanding common shares on May 18, 2001, the Company accounted for ILCO under the equity method of accounting. The Company owned approximately 48% of ILCO’s common shares prior to May 18, 2001. The restatement adjustments to the Company’s equity in earnings of affiliate are therefore equal to approximately 48% of the related adjustments to ILCO’s retained earnings and total shareholders’ equity prior to May 18, 2001. Certain restatement adjustments as described in this Note, therefore, affected the fair value of the net assets acquired from ILCO and

F-21

the cost of the investment in ILCO resulting in a decrease of $2.7 million in the remaining unamortized negative goodwill, which was recognized as a cumulative effect of a change in accounting principle in 2002 in accordance with SFAS No. 141 “Business Combinations”.

Income Taxes - - Current and deferred Federal income tax provisions were recalculated to include the impact of the restatement adjustments as described herein, and to reflect the amount of taxes receivable from the IRS and the amount of deferred Federal income tax liability resulting from the utilization of the asset and liability method after consideration of the portion of the deferred tax asset that may not be realized pursuant to the requirements of SFAS No. 109,"Accounting for Income Taxes." The Company also determined that deferred taxes had not been established related to ILCO's pension assets. Adjustments made to decrease the income tax receivable and reduce the deferred tax liability totaled $1.9 million, including an increase in accumulated other comprehensive income of $280,000 primarily as a result of changes to the deferred tax valuation allowance applied to other comprehensive income and the recalculation of deferred income taxes applied to the Company's minimum pension liability.

Other Miscellaneous – The Company recorded the following additional restatement adjustments:

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

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

• Establish sales tax accrual on actuarial consulting fees, increasing other liabilities $79,000

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

• Reduction of accrued interest on bond for which interest received was held in suspense totaling $52,000

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

• Increase in agency receivables of $183,000

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

• Correction of agent commission liability of $255,000 and allowance for agents’ balances of $157,000 due to errors in programming of the Company’s commission rate structure totaling $98,000

• Correction of treasury stock, increasing additional paid-in capital by $524,000 and common treasury stock by $122,000 and reducing other liabilities by $646,000, as a result of treasury shares distributed in 2003 in conjunction with the acquisition of the New Era companies. See Note 17 for additional details regarding the acquisition and subsequent sale of the New Era companies.

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

• Reclassifications of certain balance sheet and statement of operations items which were improperly classified, including amortization of DAC and PVFP of $121,000, premium revenue and policyholder benefits and expenses of $202,000, accrued investment income and accounts receivable of $395,000, reinsurance receivables and contractholder deposit funds of $303,000, and policyholder benefits and expenses and interest on contractholder deposit funds totaling $1.5 million.

In addition to the above restatements, the statement of cash flows for the year ended December 31, 2003 was also affected by the following items:

• Loss from discontinued operations of the New Era companies was shown as a separate line item, with offsetting reductions in change in agency advances ($273,000), change in other assets ($4,780,000), other ($442,000), and an increase in other liabilities of $560,000.

• Acquisition of subsidiary companies was adjusted to eliminate the net effects of changes in other assets and liabilities. Acquisition of subsidiary companies increased by $941,000, offset by reductions in other of $1,587,000, issuance of treasury stock of $646,000, and increases in change in other assets of $647,000 and change in other liabilities of $2,527,000.

• Adjustment to issuance of treasury stock of $127,000 due to issuance of treasury stock to 401(k) participants, reclassifying change to other.

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

F-22

In the aggregate, the correction of these errors impacted the consolidated balance sheet as of December 31, 2003, and consolidated statements of operations for the years ended December 31, 2003 and 2002, respectively, as follows (in thousands):

As of December 31, 2003	Policy Liabilities and Contract- holder Deposits	Reinsurance	Present Value of Future Profits	Other Miscellaneous and Reclassifications	Income Taxes	Total
Investments:
Policy loans	$                   -	$            -	$           -	$             (163)	$          -	$      (163)
Total investments	-	-	-	(163)	-	(163)
Cash and cash equivalents	-	-	-	249	-	249
Deferred policy acquisition costs	-	-	-	(121)	-	(121)
Present value of future profits of acquired businesses	-	-	56	121	-	177
Agency advances and other receivables	-	-	-	427	(117)	310
Reinsurance receivables	291	(650)	-	303	-	(56)
Accrued investment income	-	-	-	(447)	-	(447)
Total assets	$              291	$     (650)	$         56	$              369	$  (117)	$        (51)
Policy liabilities and contractholder deposit funds:
Contractholder deposit funds	$           4,768	$            -	$           -	$                303	$          -	$   5,071
Future policy benefits	2,063	-	-	-	-	2,063
Deferred federal income taxes	-	-	-	-	(2,036)	(2,036)
Other liabilities	-	18	-	(360)	-	(342)
Total liabilities	6,831	18	-	(57)	(2,036)	4,756
Shareholders’ equity:
Additional paid-in capital	-	-	-	524	-	524
Accumulated other comprehensive income	-	-	-	-	280	280
Retained earnings	(6,540)	(668)	56	(220)	1,639	(5,733)
Common treasury stock, at cost	-	-	-	122	-	122
Total shareholders’ equity	(6,540)	(668)	56	426	1,919	(4,807)
Total liabilities and shareholders’ equity	$              291	$      (650)	$         56	$               369	$   (117)	$        (51)

F-23

For the year ended December 31, 2003	Policy Liabilities and Contract- holder Deposits	Reinsurance	Present Value of Future Profits	Other Miscellaneous and Reclassifications	Income Taxes	Total
Revenues:
Premiums, net	$            43	$         (3)	$       -	$           (208)	$        -	$      (168)
Net investment income	-	-	-	(82)	-	(82)
Real estate income, net	-	-	-	(20)	-	(20)
Total revenues	43	(3)	-	(310)	-	(270)
Benefits and expenses:
Policyholder benefits and expenses	772	251	-	1,305	-	2,328
Interest expense on contractholder deposit funds	958	-	-	(1,506)	-	(548)
Amortization of deferred policy acquisition costs	-	-		121	-	121
Amortization of present value of future profits
of acquired business	-	-	(56)	(121)	-	(177)
Operating expenses	-	-		(277)	-	(277)
Total benefits and expenses	1,730	251	(56)	(478)	-	1,447
(Loss) income from continuing operations before
federal income taxes, discontinued operations,
and cumulative effect of change in
accounting principle	(1,687)	(254)	56	168	-	(1,717)
Federal income tax benefit:
Current	-	-	-	-	(131)	(131)
Deferred	-	-	-	-	(501)	(501)
(Loss) income from continuing operations before
discontinued operations and cumulative effect of
change in accounting principle	(1,687)	(254)	56	168	632	(1,085)
(Loss) income before cumulative effect
of change in accounting principle	(1,687)	(254)	56	168	632	(1,085)
Cumulative effect of change in accounting principle	-	-	-	-	-	-
Net (loss) income	$       (1,687)	$     (254)	$        56	$               168	$     632	$   (1,085)

F-24

For the year ended December 31, 2002	Policy Liabilities and Contract- holder Deposits	Reinsurance	Excess of Net Assets Acquired Over Cost	Other Miscellaneous and Reclassifications	Income Taxes	Total
Revenues:
Premiums, net	$             22	$          (3)	$       -	$            (213)	$      -	$      (194)
Net investment income	-	-	-	89	-	89
Real estate income, net	-	-	-	(34)	-	(34)
Total revenues	22	(3)	-	(158)	-	(139)
Benefits and expenses:
Policyholder benefits and expenses	(132)	50	-	(165)	-	(247)
Interest expense on contractholder deposit funds	575	-	-	-	-	575
Amortization of deferred policy acquisition costs	-	-	-	-	-	-
Amortization of present value of future profits
of acquired business	-	-	-	-	-	-
Operating expenses	-	-	-	(55)	-	(55)
Total benefits and expenses	443	50	-	(220)	-	273
(Loss) income from continuing operations before
federal income taxes, discontinued operations,
and cumulative effect of change
in accounting principle	(421)	(53)	-	62	-	(412)
Federal income tax benefit:
Current	-	-	-	-	(38)	(38)
Deferred	-	-	-	-	(514)	(514)
(Loss) income from continuing operations before
discontinued operations and cumulative effect of
change in accounting principle	(421)	(53)	-	62	552	140
(Loss) income before cumulative effect
of change in accounting principle	(421)	(53)	-	62	552	140
Cumulative effect of change in accounting principle	-	-	(2,650)	-	-	(2,650)
Net (loss) income	$            (421)	$        (53)	$    (2,650)	$                 62	$      552	$  (2,510)

F-25

The effect of the above restatement adjustments on the results of operations and cash flows for the years ended December 31, 2003 and 2002, respectively, and financial position as of December 31, 2003, are as follows (in thousands):

	2003
	As Previously
	Reported	As Restated
Consolidated Balance Sheet as of December 31, 2003:
Investments:
Policy loans	$       42,615	$      42,452
Total investments	688,927	688,764
Cash and cash equivalents	82,187	82,436
Deferred policy acquisition costs	54,940	54,819
Present value of future profits of acquired businesses	20,919	21,096
Agency advances and other receivables	9,931	10,241
Reinsurance receivables	40,034	39,978
Accrued investment income	7,142	6,695
Total assets	$  1,286,095	$ 1,286,044
Policy liabilities and contractholder deposit funds:
Contractholder deposit funds	$     588,810	$     593,881
Future policy benefits	167,181	169,244
Deferred federal income taxes	8,369	6,333
Other liabilities	25,655	25,313
Total liabilities	1,176,979	1,181,735
Shareholders’ equity:
Additional paid-in capital	69,867	70,391
Accumulated other comprehensive income	(2,401)	(2,121)
Retained earnings	62,721	56,988
Common treasury stock, at cost	(23,575)	(23,453)
Total shareholders’ equity	109,116	104,309
Total liabilities and shareholders’ equity	$  1,286,095	$ 1,286,044

F-26

	2003		2002
	As Previously		As Previously
	Reported	As Restated	Reported	As Restated
Consolidated Statements of Operations for the years ended
December 31, 2003 and 2002:
Revenues:
Premiums, net	$       31,225	$      31,057	$       38,866	$      38,672
Net investment income	35,428	35,346	38,079	38,168
Real estate income, net	2,387	2,367	2,904	2,870
Total revenues	111,667	111,397	121,175	121,036
Benefits and expenses:
Policyholder benefits and expenses	45,086	47,414	53,710	53,463
Interest expense on contractholder deposit funds	26,362	25,814	29,692	30,267
Amortization of deferred policy acquisition costs	9,653	9,774	11,013	11,013
Amortization of present value of future profits of acquired business	4,641	4,464	4,246	4,246
Operating expenses	41,769	41,492	34,628	34,573
Total benefits and expenses	130,911	132,358	133,289	133,562
Loss from continuing operations before federal income
taxes, discontinued operations, and cumulative effect of
change in accounting principle	(19,244)	(20,961)	(12,114)	(12,526)
Federal income tax benefit:
Current	(1,482)	(1,613)	(21)	(59)
Deferred	(1,397)	(1,898)	(2,948)	(3,462)
Loss from continuing operations before discontinued
operations and cumulative effect of change in accounting principle	(16,365)	(17,450)	(9,145)	(9,005)
Loss before cumulative effect of change in accounting principle	(22,498)	(23,583)	(9,145)	(9,005)
Cumulative effect of change in accounting principle	-	-	6,790	4,140
Net loss	$      (22,498)	$   (23,583)	$       (2,355)	$     (4,865)
Net loss per share (basic and diluted)	$         (2.34)	$      (2.44)	$        (0.25)	$       (0.51)

F-27

	2003		2002
	As Previously		As Previously
	Reported	As Restated	Reported	As Restated
Consolidated Statements of Cash Flows for the years
ended December 31, 2003 and 2002:
Cash flows from operating activities:
Net loss	$       (22,498)	$      (23,583)	$        (2,355)	$         (4,865)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Amortization of deferred policy acquisition costs	9,653	9,774	11,013	11,013
Amortization of present value of future profits of acquired business	4,641	4,464	4,246	4,246
Depreciation	2,545	3,363	2,864	2,882
Cumulative effect of change in accounting principle	-	-	(6,790)	(4,140)
Loss on sale of discontinued operations	-	4,935	-	-
Changes in assets and liabilities:
Decrease (increase) in accrued investment income	(283)	138	125	94
Decrease (increase) in agency advances and other receivables	5,628	4,106	(1,423)	(1,487)
Decrease in reinsurance receivables	2,348	2,005	4,882	5,355
Decrease (increase) in other assets	10,623	6,489	(10)	(432)
Increase in policy liabilities and accruals	1,789	4,070	3,856	7,896
Increase (decrease) in other liabilities	547	2,654	(2,576)	(3,178)
Decrease in deferred federal income taxes	(1,828)	(2,229)	(1,259)	(1,763)
Other	1,461	1,806	(623)	1,630
Net cash provided by operating activities	2,419	5,785	5,212	10,513
Cash flows from investing activities:
Real estate capital expenditures	(1,087)	(1,281)	(13,556)	(13,673)
Proceeds from sales and maturities of fixed maturities	418,971	417,628	244,910	243,356
Net decrease in short-term investments	125	126	47,683	47,682
Net decrease in policy loans	2,578	2,557	3,399	3,436
Acquisition of subsidiary companies, net of cash acquired	(3,183)	(4,124)	-	-
Purchase of property and equipment	(247)	(480)	(1,064)	(1,128)
Net cash (used in) provided by investing activities	(94,422)	(97,153)	70,368	68,669
Cash flow from financing activities:
Cash dividends to shareholders	(483)	(480)	(2,134)	(2,021)
Issuance of capital stock	1,895	1,383	1,007	1,007
Contractholder fund deposits	57,458	57,458	55,368	55,341
Contractholder fund withdrawals	(62,163)	(62,163)	(64,085)	(67,677)
Purchase of treasury stock	(320)	(1,103)	(362)	(460)
Sales of treasury stock	-	656	-	-
Net cash provided by (used in) financing activities	11,387	10,751	(10,206)	(13,810)
Net increase (decrease) in cash	$       (80,616)	$      (80,617)	$         65,374	$          65,372

F-28

Additionally, the effect of the above restatement adjustments decreased retained earnings as of January 1, 2002 in the following categories (in thousands):

Policy liabilities and contractholder deposit funds	$       4,432
Reinsurance	360
Excess of net assets acquired over cost	(2,650)
Other miscellaneous	451
Income taxes	(455)
	$       2,138

3. Investments

Fixed Maturities and Equity Securities

Investments in fixed maturities and equity securities and related unrealized gains and losses are detailed as follows:

		December 31, 2004
			Gross	Gross
		Amortized	Unrealized	Unrealized	Fair
		Cost	Gains	Losses	Value
		(In thousands)
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S.
	government agencies and corporations	$          39,085	$              482	$                74	$         39,493
States, municipalities and political subdivisions		16,720	228	363	16,585
Corporate		252,449	5,296	1,166	256,579
Mortgage-backed and asset-backed		192,447	983	6,932	186,498
Total fixed maturities		$       500,701	$           6,989	$           8,535	$       499,155
Equity securities available for sale		$          6,311	$          2,214	$                23	$          8,502
		December 31, 2003
			Gross	Gross
		Amortized	Unrealized	Unrealized	Fair
		Cost	Gains	Losses	Value
		(In thousands)
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S.
	government agencies and corporations	$         50,974	$            1,858	$                  2	$         52,830
States, municipalities and political subdivisions		16,824	258	951	16,131
Corporate		183,054	5,996	1,111	187,939
Mortgage-backed and asset-backed		306,433	1,943	9,475	298,901
Total fixed maturities available for sale		557,285	10,055	11,539	555,801
Fixed maturities held to maturity:
Corporate		17	2	-	19
Total fixed maturities		$      557,302	$         10,057	$         11,539	$      555,820
Equity securities available for sale		$          6,393	$          1,589	$                41	$          7,941

F-29

The Company’s insurance subsidiaries are required to maintain assets on deposit with state regulatory authorities. Such assets are included in fixed maturities and have an aggregate fair value of $13.9 million and $11.8 million at December 31, 2004 and 2003, respectively.

For investments of fixed maturities that have unrealized losses at December 31, 2004, the fair value, gross unrealized losses, and length of time that individual securities have been in a continuous unrealized loss position are as follows:

		2004
		Less than 12 months		12 months or more		Total
		Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
		Value	Losses	Value	Losses	Value	Losses
		(In thousands)
U.S. Treasury and other U.S. government
	agencies and corporations	$ 26,624	$ 74	$         -	$         -	$ 26,624	$ 74
States, municipalities, and
	political subdivisions	994	6	12,496	357	13,490	363
Corporate		81,032	544	23,077	622	104,109	1,166
Mortgage-backed and asset-backed		45,398	362	64,963	6,570	110,361	6,932
Fixed maturities available for sale		$154,048	$ 986	$100,536	$ 7,549	$254,584	$ 8,535
		2003
		Less than 12 months		12 months or more		Total
		Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
		Value	Losses	Value	Losses	Value	Losses
		(In thousands)
U.S. Treasury and other U.S. government
	agencies and corporations	$ 11,989	$ 2	$        -	$    -	$ 11,989	$ 2
States, municipalities, and
	political subdivisions	13,342	951	-	-	13,342	951
Corporate		53,198	1,111	-	-	53,198	1,111
Mortgage-backed and asset-backed		175,184	9,199	21,087	276	196,271	9,475
Fixed maturities available for sale		$253,713	$ 11,263	$ 21,087	$ 276	$274,800	$11,539

At December 31, 2004, the Company held five U.S. Treasury securities with unrealized losses caused by interest rate increases. At December 31, 2003, the Company held two U.S. Treasury securities with unrealized losses caused by interest rate increases.

At December 31, 2004, the Company held three investments in debt securities issued by states, municipalities, and political subdivisions with unrealized losses caused primarily by market interest rate increases. The average unrealized loss on these securities was 3% of carrying value. The three securities are rated by a credit agency and had an investment grade rating of A- or higher. At December 31, 2003, the Company held four investments in debt securities issued by states, municipalities, and political

F-30

subdivisions with unrealized losses caused primarily by market interest rate increases. The average unrealized loss on these securities was 6.7% of carrying value. Three of these securities are rated by a credit agency and had an investment grade rating of AAA.

At December 31, 2004, the Company held twenty-two investments in debt securities issued by corporations with unrealized losses caused by interest rate increases. The average unrealized loss on these securities was 1% of carrying value. Twenty-one of these investments had investment grade ratings by a ratings agency. At December 31, 2003, the Company held seventeen investments in debt securities issued by corporations with unrealized losses caused by interest rate increases. The average unrealized loss on these securities was 2% of carrying value. Sixteen of these investments had investment grade ratings by a ratings agency.

At December 31, 2004, the Company held thirty-six investments in mortgage-backed or asset-backed securities with unrealized losses caused by interest rate increases. The average unrealized loss on these securities was 6% of carrying value. At December 31, 2003, the Company held forty investments in mortgage-backed or asset-backed securities with unrealized losses caused by interest rate increases. The average unrealized loss on these securities was 4.6% of carrying value.

Because of the high ratings of these investments and the Company’s ability and intent to hold these investments until recovery of fair value, which may be maturity or earlier if called, the Company does not consider these unrealized losses to be other than temporary.

There were no impairments in the value of investments in 2004 which were considered other than temporary. During 2003, the Company identified eight securities which were considered impaired and reduced their carrying value by $5.2 million. All eight fixed-maturity securities were sold during the fourth quarter of 2003. At December 31, 2003, the Company identified six additional securities which were considered impaired and reduced their carrying value by $1.6 million. All six of these fixed-maturity securities were sold in 2004. The Company also identified one security at December 31, 2002, that was considered to be impaired and reduced its carrying value by $463,000. Additionally at December 31, 2002, the Company determined that its investments in its separate accounts, which are classified as equity securities, were impaired and reduced the carrying values by $2.5 million.

As part of the Company’s ongoing investment review, the Company has reviewed its fixed maturities and equity securities investment portfolio and concluded that there were no additional other-than-temporary impairments as of December 31, 2004 or 2003. Due to the issuers’ continued satisfaction of the investment obligations in accordance with their contractual terms and management’s expectation that they will continue to do so, management’s intent and ability to hold these securities, as well as the evaluation of the fundamentals of the issuers’ financial condition and other objective evidence, the Company believes that unrealized losses on these investments at December 31, 2004, and 2003 were temporary.

In evaluating whether a decline in value is other than temporary, the Company considers several factors including, but not limited to, the following; (1) whether the decline is substantial; (2) the duration; (3) the reasons for the decline in value (credit event, interest related, or market fluctuations); (4) the Company’s ability and intent to hold the investments for a period of time to allow for a recovery of value; and (5) the financial condition of and near term prospects of the issuer. The evaluation for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or near term recovery prospects, and the effects of changes in interest rates.

The amortized values and market values of fixed maturities at December 31, 2004, are shown below by contractual maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized	Fair
	Value	Value
	(In thousands)
Due in one year or less	$             8,171	$            8,343
Due after one year through five years	117,871	119,398
Due after five years through ten years	104,359	106,448
Due after ten years	77,853	78,468
Mortgage-backed and asset-backed securities	192,447	186,498
Total fixed maturities	$         500,701	$        499,155

F-31

The net change in unrealized gains (losses) on fixed maturities available for sale and equity securities represent a component of accumulated other comprehensive income for the years ended December 31, 2004, 2003, and 2002. The following is a summary of the change in unrealized gains (losses), net of the effects on DAC and PVFP and related deferred income taxes, that are reflected in accumulated other comprehensive income for the periods presented.

	Year Ended December 31,
		2003
	2004	Restated	2002
	(In thousands)
Fixed maturities	$             (65)	$        (21,100)	$      11,776
Equity securities	643	1,578	543
Gross unrealized gains (losses)	578	(19,522)	12,319
Effect on other balance sheet accounts	(65)	5,426	(3,537)
Deferred federal income taxes	146	4,615	(3,008)
Net change in unrealized gains (losses) on investments	$                 659	$          (9,481)	$         5,774

The following table sets forth unrealized holding gains (losses) on investments arising during the year and the reclassification adjustments required for the years ended December 31, 2004, 2003, and 2002:

		Year Ended December 31,
		2004	2003	2002
		(In thousands)
Reclassification adjustments:
Unrealized holding gains (losses) on investments arising
	during the period, net of taxes	$ (74)	$ (9,215)	$ 7,597
Reclassification adjustments for (gains) losses included
	in net income, net of taxes	733	(266)	(1,823)
Unrealized gains (losses) on investments, net of reclassification
	adjustment, net of taxes	$ 659	$ (9,481)	$ 5,774

Mortgage Loans

In 2002 the Company agreed to a proposed $3.6 million payoff of two mortgage loans on properties located in the state of New York, Champlain Centre Mall and Salmon Run Mall, with a total balance due of $4.6 million by the borrower. As a result, the Company recorded a realized loss of $955,000 in 2002 from this discounted payoff which is included in realized losses on investments in the consolidated statement of operations.

Investment Real Estate

Investors Life completed development of the River Place Pointe office complex in 2002. River Place Pointe consists of seven office buildings, with rentable space of approximately 584,000 square feet, and associated parking, drives, and related improvements on 48 acres of land in Austin, Texas. At December 31, 2004, the Company occupied Building One, consisting of approximately 76,000 square feet and approximately 4,000 square feet in Building Four. Approximately 333,310 square feet of the remaining 370,228 square feet in Buildings Two, Three, Four and Six were leased to third parties. The remaining two buildings (Buildings Five and Seven) were not leased at December 31, 2004. The office building (Building One) occupied by the Company,

F-32

which is reflected in the accompanying consolidated financial statements as real estate held for use, was $13.6 million and $13.9 million at December 31, 2004 and 2003, respectively. Investment real estate, which is comprised of the other six buildings in the River Place Pointe office complex, was $76.6 million and $76.7 million at December 31, 2004 and 2003, respectively. In 2005, the Company sold all seven buildings in the River Place Pointe office complex. See Note 18 for additional details regarding the sale of River Place Pointe.

River Place Pointe and properties held for sale are leased under agreements classified as operating leases. The Company is generally responsible for the payment of property taxes, insurance and maintenance costs related to the real estate properties. Future minimum lease payments receivable for River Place Pointe and other properties (excluding rental income related to the Company’s occupancy of Building One of River Place Pointe) under noncancelable leasing arrangements as of December 31, 2004, are as follows (in thousands):

For the years ending December 31:
	2005	$ 7,039
	2006	6,066
	2007	5,404
	2008	1,768
	2009	590
	Thereafter	229
		$ 21,096

Accumulated depreciation on investment real estate totaled $9.0 million and $6.5 million as of December 31, 2004 and 2003, respectively.

Real Estate Held for Sale

The Company determined in 2003 to sell all of its investment real estate, excluding River Place Pointe. Accordingly, the carrying value of seven properties aggregating $968,000 was evaluated and reclassified as real estate held for sale in the accompanying consolidated balance sheet at December 31, 2003. During 2004, the Company sold two properties held for sale generating gross proceeds of $2.0 million and realized gains aggregating $1.7 million. At December 31, 2004, the remaining five properties classified as real estate held for sale had a carrying value of $589,000. See Note 18 for additional details regarding the sale of properties subsequent to December 31, 2004. Accumulated depreciation on real estate held for sale totaled $2.7 million and $3.4 million as of December 31, 2004 and 2003, respectively.

Non-Income Producing Investments

The carrying values of investments at December 31, 2004 and 2003 that were non-income producing, for the preceding 12 months, were as follows:

		December 31,
		2004	2003
		(In thousands)
Investment real estate:
	River Place Pointe non-leased buildings	$  21,421	$   32,401
	Others	81	81
		$  21,502	$   32,482

Net Investment Income

The components of net investment income are summarized as follows:

F-33

	Year Ended December 31,
		2003	2002
	2004	Restated	Restated
	(In thousands)
Fixed maturities	$            27,386	$           31,846	$           30,783
Other, including short-term investments and policy loans	4,036	4,177	7,487
Gross investment income	31,422	36,023	38,270
Investment expenses	(719)	(677)	(102)
Net investment income	$            30,703	$           35,346	$           38,168

Net Realized Investment Gains

Proceeds and gross realized gains (losses) from sales of fixed maturities available for sale are summarized as follows:

	Year Ended December 31,
	2004	2003	2002
	(In thousands)
Proceeds	$ 155,786	$ 282,115	$ 61,800
Gross realized gains	$ 1,810	$ 6,685	$ 1,171
Gross realized losses	(702)	(5,513)	(57)
Net realized investment gains	$ 1,108	$ 1,172	$ 1,114

F-34

4. Fair Values of Financial Instruments

The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2004 and 2003 are as follows:

		2004		2003
		Carrying	Fair	Carrying	Fair
		Value	Value	Value	Value
		(In thousands)		(In thousands)
Financial assets:
	Fixed maturity securities held to maturity	$                   -	$                  -	$                  17	$                 19
	Fixed maturity securities available for sale	499,155	499,155	555,801	555,801
	Fixed maturity securities held for trading	1,057	1,057	4,873	4,873
	Equity securities	8,502	8,502	7,941	7,941
	Policy loans	39,855	49,343	42,452	42,452
	Short-term investments	62,514	62,514	-	-
	Cash and cash equivalents	52,044	52,044	82,436	82,436
	Separate account assets	359,876	359,876	358,271	358,271
Financial liabilities:
	Separate account liabilities	$        359,876	$        359,876	$        358,271	$       358,271
	Deferred annuities	145,010	139,825	150,691	145,490
	Notes payable	15,000	15,000	15,000	15,000
	Supplemental contracts	10,965	10,965	12,729	12,418

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

Fixed Maturities, Trading Securities, and Equity Securities

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

Policy Loans

Fair values of policy loans are estimated using discounted cash flow analysis, using interest rates offered for similar loans to borrowers with similar credit ratings. Policy loans with similar characteristics are aggregated for purposes of the calculation.

Separate Account Assets and Liabilities

Separate account assets and liabilities represent the market value of policyholder funds maintained in accounts having specific investment objectives.

Cash, Cash Equivalents, and Short-term Investments

The carrying value of these instruments approximates fair value due to the short-term nature of these items.

Deferred Annuities and Supplemental Contracts

The fair values of deferred annuities are estimated using cash surrender values. Fair values for supplemental contracts are estimated using a discounted cash flow analysis, based on interest rates currently offered on similar products.

Notes Payable

The carrying value of notes payable approximates the fair value as the interest rate is variable.

F-35

5. Deferred Policy Acquisition Costs

An analysis of deferred policy acquisition costs follows:

	Year Ended December 31,
		2003
	2004	Restated	2002
	(In thousands)
Deferred policy acquisition costs, beginning of year	$            54,819	$         51,213	$         55,223
Policy acquisition costs deferred	6,372	8,255	10,372
Amortization, net of interest accretion	(10,479)	(9,774)	(11,013)
Adjustments for unrealized gains/losses on investment securities	(72)	5,125	(3,369)
Deferred policy acquisition costs, end of year	$           50,640	$         54,819	$         51,213

6. Present Value of Future Profits of Acquired Businesses

An analysis of the present value of future profits of acquired businesses follows:

	Year Ended December 31,
		2003
	2004	Restated	2002
	(In thousands)
Present value of future profits, beginning of year	$      21,096	$      25,259	$     29,673
Accretion of interest	1,735	1,841	2,157
Amortization	(4,933)	(6,305)	(6,403)
Adjustments for unrealized gains/losses on investment securities	7	301	(168)
Present value of future profits, end of year	$     17,905	$     21,096	$     25,259

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

2005	$ 2,746
2006	$ 2,310
2007	$ 2,037
2008	$ 1,719
2009	$ 1,470

7. Notes Payable

In May, 2003, the Company issued $15 million aggregate principal amount of Floating Rate Senior Notes due 2033 (the “Senior Notes”) and entered into a Senior Notes Subscription Agreement (“Subscription Agreement”) with InCapS Funding I, Ltd. (“InCapS”), wherein InCapS agreed to purchase the Senior Notes. The Senior Notes were issued on May 22, 2003, pursuant to an indenture between FIC and Wilmington Trust Company, as Trustee.

The principal amount of the Senior Notes is to be paid on May 23, 2033, and interest is to be paid quarterly, beginning on August 23, 2003, at the rate of 4.20% over LIBOR (rate is recalculated quarterly and may not exceed 12.5% prior to May 2008). FIC may redeem the Senior Notes at any time on or after May 23, 2008, by payment of 100% of the principal amount of the Senior Notes being redeemed plus unpaid interest. Proceeds from the Senior Notes were used to fund the acquisition of the New Era companies (See Note 17) and to reduce intercompany payable balances.

F-36

8. Income Taxes

The Company files a consolidated federal income tax return with its subsidiaries, except for Investors Life and ILG Securities, which file separate returns.

Total income taxes were allocated as follows:

			Year Ended December 31,
				2003	2002
			2004	Restated	Restated
			(In thousands)
Tax provision (benefit) on income or loss from:
	Continuing operations		$          (2,204)	$         (3,511)	$         (3,521)
	Discontinued operations		-	-	-
	Cumulative effect of change in accounting principle		118	-	-
Total tax provision (benefit) on income or loss			(2,086)	(3,511)	(3,521)
Tax provision (benefit) on components of shareholders’ equity:
	Net unrealized gains/losses on:
		Fixed maturities available for sale	(364)	(5,153)	2,818
		Equity securities	218	538	190
	Additional paid in capital - stock option tax (benefit)		-	(329)	(261)
	Minimum pension liability		(1,495)	(95)	(214)
Total tax provision (benefit) on shareholders’ equity			(1,641)	(5,039)	2,533
Total provision (benefit) for income taxes			$         (3,727)	$         (8,550)	$             (988)

The provision for income taxes is less than the amount of income taxes determined by applying the U.S. statutory income tax rate of 34% to pre-tax income from continuing operations (before cumulative effect of change in accounting principle), as a result of the following differences:

		Year Ended December 31,
			2003	2002
		2004	Restated	Restated
		(In thousands)
Income taxes at the statutory rate		$        (5,703)	$         (7,127)	$         (4,259)
Increase (decrease) in taxes resulting from:
	Dividends received deduction	(21)	(27)	(83)
	Tax-exempt interest	-	(2)	(5)
	Nondeductible goodwill	256	-	-
	Valuation allowance	3,264	3,582	767
	Other items, net	-	63	59
Total provision (benefit) for income taxes on continuing operations		$        (2,204)	$         (3,511)	$         (3,521)

F-37

The provision (benefit) for income taxes differs from the income taxes determined by applying the U.S. statutory income tax rate of 34% to pre-tax loss from discontinued operations for the year ended December 31, 2003, as detailed below (in thousands):

Income taxes at the statutory rate	$   (2,085)
Valuation allowance	2,085
Total provision (benefit) for income taxes on discontinued operations	$           -

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

Current federal income taxes receivable totaled $5.3 million and $6.0 million at December 31, 2004 and 2003, respectively.

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

		December 31,
			2003
		2004	Restated
		(In thousands)
Deferred tax liabilities:
Deferred intercompany gain		$             339	$             518
Deferred policy acquisition costs		11,334	12,150
Present value of future profits of acquired business		6,070	7,157
Deferred and uncollected premium		695	803
Reinsurance receivables		3,051	3,635
Unrealized (depreciation) appreciation on securities		221	46
Prepaid expenses		1,360	1,588
Other taxable temporary differences		824	282
	Total deferred tax liabilities	23,894	26,179
Deferred tax assets:
Policy reserves		8,106	9,448
Net operating loss carry forward		15,479	10,880
Fixed maturity securities		-	472
Agency advances		187	249
Other receivables		293	293
Pension liability		2,572	974
Other deductible temporary differences		3,509	4,284
	Total deferred tax assets	30,146	26,600
	Valuation allowance	(9,801)	(6,754)
	Net deferred tax assets	20,345	19,846
Net deferred tax liabilities		$          3,549	$           6,333

Under the provisions of pre-1984 life insurance company income tax regulations, a portion of “gain from operations” of Investors Life was not subject to current taxation but was accumulated, for tax purposes, in special tax memorandum accounts designated as “policyholders’ surplus accounts.” Subject to certain limitations, “policyholders’ surplus” is not taxed until distributed or the insurance company no longer qualifies to be taxed as a life insurance company. The accumulation in this account for Investors Life at December 31, 2004, was $12.6 million. Federal income tax of which $4.4 million would be due if the entire balance is distributed at a tax rate of 35%.

The Company does not anticipate any transactions that would cause any part of the policyholders’ surplus accounts to become taxable and, accordingly, deferred taxes have not been provided on such amounts. At December 31, 2004, Investors Life has  

F-38

approximately $165.6 million in the aggregate in its shareholders’ surplus account from which distributions could be made without incurring any federal tax liability.

FIC and its subsidiaries have no taxes paid in prior years that can be recovered in the event of future operating losses.

At December 31, 2004, the Company and its non-life insurance wholly owned subsidiaries have net operating loss carry forwards of approximately $34.6 million, which will begin to expire in 2008. Approximately $31.3 million of these loss carry forwards are not scheduled to expire until years 2018 through 2024 and are available to offset taxable income of members of the FIC group excluding Investors Life. The Company’s life insurance subsidiaries have operating loss deduction carryforwards of approximately $11.7 million that will begin to expire in 2018.

The Company has a valuation allowance of approximately $9.8 million as of December 31, 2004 and $6.8 million as of December 31, 2003 and an increase in the valuation allowance of $3.0 million in 2004 and $6.0 million in 2003.

The Company establishes a valuation allowance when management believes, based on the weight of the available evidence, that it is more likely than not that some portion of the deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon the Company's generation of sufficient taxable income in the future to recover tax benefits that cannot be recovered from taxes paid in prior periods. Management has established a valuation allowance of $9.8 million and $6.8 million as of December 31, 2004 and 2003, respectively, against the portion of the deferred tax asset that has expiration dates prior to which those deferred assets must be utilized. These deferred tax assets are primarily comprised of the nonlife net operating losses described above. The Company has determined primarily due to the Company’s cumulative loss position over the past three years that the deferred tax asset will more likely than not be realized through reductions of future taxes, except as otherwise provided.

9. Reinsurance

Family Life and Investors Life reinsure portions of certain policies they write, thereby providing greater diversification of risk and minimizing exposure on larger policies. Generally, the reinsurer receives a proportionate part of the premiums less commissions and is liable for a corresponding part of benefit payments. The Company’s retention on any one individual ranges up to $250,000 depending on the risk.

Policy liabilities and contractholder deposit funds are reported in the consolidated financial statements before considering the effect of reinsurance ceded. The insurance subsidiaries remain liable to the extent the reinsurance companies are unable to meet their obligations under the reinsurance agreements.

The components of reinsurance receivables as presented in the consolidated financial statements are as follows:

	December 31,
		2003
	2004	Restated
	(In thousands)
Receivable related to modified coinsurance agreement	$    25,665	$   27,526
Future policy benefits ceded	5,210	5,436
Other reinsurance recoverables	3,718	5,191
Other policy claims and benefits	2,319	1,825
Total reinsurance receivables	$  36,912	$ 39,978

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The amounts in the consolidated statements of operations have been reduced by reinsurance ceded as follows:

	Year Ended December 31,
	2004	2003 Restated	2002 Restated
	(In thousands)
Premiums	$    4,163	$      4,014	$      2,822
Policyholder benefits and expenses	$    2,491	$      1,970	$      3,967

Estimated amounts recoverable from reinsurers on paid claims are $1.2 million and $1.7 million in 2004 and 2003, respectively. These amounts are included in reinsurance receivables in the consolidated financial statements at December 31, 2004 and 2003.

10. Shareholders’ Equity

Dividend Restrictions

The Company’s ability to pay dividends to its shareholders is affected, in part, by receipt of dividends from Family Life and Investors Life. Family Life and Investors Life were domiciled in the State of Washington as of December 31, 2003. On March 18, 2004, both companies were redomesticated to the State of Texas. Accordingly, the ability to pay dividends by these insurance companies is regulated by the Texas Department of Insurance. Under current Texas law, any proposed payment of an “extraordinary dividend” requires a 30-day prior notice to the Texas Insurance Commissioner, during which period the Commissioner can approve the dividend, disapprove the dividend, or fail to comment on the notice, in which case the dividend is deemed approved at the end of the 30-day period. An “extraordinary dividend” is a distribution which, together with dividends or distributions paid during the preceding twelve months, exceeds the greater of (i) 10% of statutory surplus as of the preceding December 31 or (ii) the statutory net gain from operations for the preceding calendar year. Payment of a regular dividend requires that the insurer's earned surplus after dividends or distributions must be reasonable in relation to the insurer’s outstanding liabilities and adequate to its financial needs. No dividends were paid to the Company by either insurance subsidiary in 2004 or 2003.

The Company’s ability to pay dividends to shareholders is also affected by the obligations of FIC and FLC to make principal and interest payments pursuant to their subordinated notes payable to Investors Life. With the approval of the Texas Department of Insurance, these loans were restructured as of March 18, 2004. As amended, the loans provide for a reduction in the interest rate from 9% to 5% for the balance of the term of the loans, no required principal payments for the period from June 12, 2004, to December 12, 2005, a resumption of principal payments on March 12, 2006, and ten equal quarterly principal payments until the maturity date of June 12, 2008. However, these subordinated notes were again restructured subsequent to December 31, 2004, as described in Note 18. The aggregate unpaid balance of the subordinated notes was $15.4 million and $16.9 million at December 31, 2004 and 2003, respectively.

Regulatory Capital Requirements of Insurance Companies

The Texas Department of Insurance imposes minimum risk-based capital requirements on insurance companies that were developed by the National Association of Insurance Commissioners (“NAIC”). The formulas for determining the amount of risk-based capital (“RBC”) specify various weighting factors that are applied to statutory financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of a company’s regulatory total adjusted capital to its 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. The RBC solvency margins for Family Life and Investors Life at December 31, 2004 and 2003 were in excess of NAIC minimum standards.

NAIC IRIS Ratios

The NAIC Regulatory Information System (“IRIS”) ratios cover 12 categories of financial data with defined “usual” ranges for each such category. The ratios are intended to provide insurance regulators with “early warnings” as to when a given company might warrant special attention. An insurance company may fall outside of the usual range for one or more ratios, and such variances may result from specific transactions that are, by themselves, immaterial or eliminated at the consolidation level. In certain states, insurers with more than three IRIS ratios outside of the NAIC usual ranges may be subject to increased regulatory oversight. For 2004, each of the Company’s insurance subsidiaries had six IRIS ratios outside of the usual ranges. For Family Life,  

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the ratios outside the usual ranges were primarily related to changes in capital and surplus, net income, investment income, and non-admitted assets. For Investors Life, the ratios outside the usual ranges were primarily related to investment income and changes in premium. Both Family Life and Investors Life continue to maintain capital and surplus positions which significantly exceed risk-based capital (“RBC”) and other regulatory requirements.

Capital and Surplus of Insurance Companies

Capital and surplus of Family Life as determined in accordance with statutory accounting practices prescribed or permitted by the State of Texas at December 31, 2004 and 2003, was $18.9 million and $25.4 million, respectively. Statutory net income (loss) was $(2.2 million), $2.3 million, and $4.1 million for the years ended December 31, 2004, 2003, and 2002, respectively.

Capital and surplus of Investors Life as determined in accordance with statutory accounting practices prescribed or permitted by the State of Texas at December 31, 2004 and 2003, was $25.7 million and $34.4 million, respectively. Statutory net income (loss) was $(3.0 million), $(3.3 million), and $903,000 for the years ended December 31, 2004, 2003, and 2002, respectively.

The Company’s insurance subsidiaries, Family Life and Investors Life, prepare their statutory financial statements in conformity with accounting practices prescribed or permitted by the State of Texas for 2004 and 2003 and by the State of Washington for 2002. The prescribed or permitted accounting practices for Texas and Washington differ in certain instances from the NAIC Accounting Practices and Procedures Manual (“NAIC SAP”) as described in more detail below.

Family Life and Investors Life are reporting their investment in FIC common stock under a prescribed practice pursuant to the Texas Department of Insurance (“TDI”).

A residential real estate property owned by Investors Life was non-admitted pursuant to accounting practices prescribed by the TDI.

Fixed assets such as furniture and equipment must be non-admitted under NAIC SAP. However, pursuant to accounting practices prescribed by the TDI, Investors Life has admitted certain qualifying furniture and equipment in 2004 and 2003.

In 2004, policy reserves for flexible premium universal life insurance policies were reported in accordance with accounting practices required by NAIC SAP and TDI. In 2003, the companies employed practices prescribed by the State of Washington.

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A reconciliation of the capital and surplus at December 31, 2004 and 2003 between NAIC SAP and practices prescribed and permitted by the State of Texas is shown below:

	December 31,
	2004	2003
Family Life:	(In thousands)
Capital and surplus as reported in audited statutory financial statements	$           18,914	$           25,373
State prescribed practices:
Investment in FIC common stock	(3,893)	(5,933)
State permitted practices:
Aggregate reserves for life insurance policies	-	2,872
Capital and surplus per NAIC SAP	$           15,021	$           22,312

	December 31,
	2004	2003
Investors Life:	(In thousands)
Capital and surplus as reported in audited statutory financial statements	$           25,711	$           34,415
State prescribed practices:
Investment in FIC common stock	(7,737)	(8,094)
Investment in real estate	211	211
Furniture and equipment	(266)	(873)
State permitted practices:
Aggregate reserves for life insurance policies	-	681
Capital and surplus per NAIC SAP	$            17,919	$          26,340

11. Retirement Plans and Employee Stock Plans

Retirement Plans

A. Family Life

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

a. The Normal Retirement Date for all employees is the first day of the month coinciding with or next following the later of attainment of age 65 or the fifth anniversary of employment.

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

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

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

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c. Effective April 1, 1997, the Family Life Pension Plan was amended to provide that the accrual rate for future service is 1.57% of Final Average Earnings multiplied by Credited Service after March 31, 1997, less 0.65% of Final Average Earnings up to Covered Compensation. With respect to service prior to April 1, 1997, the accrual rate described in paragraph (b), above, is applicable, with Average Final Earnings taking into account a participant’s earnings subsequent to April 1, 1997.

d. Effective March 31, 2004, all employees covered under the plan were terminated. No new employees are permitted to enter or re-enter the plan. Thus, as of December 31, 2005, the plan only consists of retirees currently receiving pensions and vested terminated employees entitled to future benefits upon attaining normal or early retirement age.

Average Final Earnings are the highest average Considered Earnings during any five consecutive years while an active participant. Total Credited Past Service plus Credited Future Service is limited to 30 years. A detail of plan disclosures, based on a measurement date of December 31 for each year, is provided below.

A curtailment occurred on January 1, 2004 when the decision was made to terminate the employment of all active participants in the plan as discussed in item (d) above. Because the plan’s unrecognized losses exceeded the decrease in PBO caused by the curtailment as of January 1, 2004, the SFAS No. 88 curtailment charge recognized in the 2004 expense was zero. (The plan was subsequently amended to prevent any new or rehired employee from entering or reentering the plan in the future. Thus, the plan is now frozen.)

A settlement occurred on December 31, 2004 due to the settlement of several former employees’ plan obligations through the payment of lump sums. A settlement occurs whenever the lump sums paid during the year exceed the sum of the plans Service Cost and Interest Cost components of expense for that year. The settlement resulted in the recognition of a $399,000 charge to expense for 2004.

The pension costs for the Family Life Pension Plan include the following components:

	Year Ended December 31,
	2004	2003	2002
	(In thousands)
Service cost for benefits earned during the year	$                 -	$             66	$                66
Interest cost on projected benefit obligation	508	546	541
Expected return on plan assets	(432)	(314)	(512)
Amortization of unrecognized prior service cost	-	-	-
Amortization of unrecognized (gains)/losses	77	180	191
Recognition of net loss due to settlement	399	-	-
Net periodic benefit cost	$              552	$               478	$              286

Weighted-average assumptions used to determine net periodic benefit cost:

	Year Ended December 31,
	2004	2003	2002
Discount rate	6.25%	6.75%	7.25%
Expected long-term return on plan assets	7.25%	4.75%	8.00%
Rate of compensation increase	N/A	5.00%	5.00%

The Plan Sponsor employs a building block approach in determining the expected long-term rate of return on plan assets. Historical markets are studied and long-term historical relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term market assumptions are determined. The long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed to check for reasonability and appropriateness.

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The following summarizes the obligations and funded status of the Family Life Pension Plan:

			December 31,
			2004	2003
			(In thousands)
Change in benefit obligation:
	Benefit obligation at beginning of year		$           8,661	$           8,454
		Service cost	-	66
		Interest cost	508	546
		Benefits paid	(145)	(518)
		Liability actuarial loss	1,421	113
		Curtailments	(414)	-
		Annual lump sum distribution or other expected settlements	(868)	-
	Benefit obligation at end of year		9,163	8,661
Change in plan assets:
	Fair value of plan assets at beginning of year		6,341	6,625
		Actual return on plan assets	177	58
		Employer contributions	389	176
		Benefits paid	(145)	(518)
		Annual lump sum distribution or other expected settlements	(868)	-
	Fair value of plan assets at end of year		5,894	6,341
Funded status:
	Funded status at end of year		(3,269)	(2,320)
		Unrecognized prior service cost	-	-
		Unrecognized actuarial net loss	4,207	3,421
	Net amount recognized		$              938	$           1,101
Amounts recognized in the consolidated balance sheets consist of:
	Prepaid benefit cost		$                  -	$                -
	Accrued benefit cost		(3,269)	(1,763)
	Intangible asset		-	-
	Accumulated other comprehensive income		4,207	2,864
	Net amount recognized		$             938	$           1,101

	December 31,
	2004	2003
	(In thousands)
Projected benefit obligation	$           9,163	$           8,661
Accumulated benefit obligation	$           9,163	$           8,104
Fair value of plan assets	$           5,894	$           6,341

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Weighted average assumptions used to determine benefit obligations:

	December 31,
	2004	2003
Discount rate	5.25%	6.25%
Rate of compensation increase	N/A	4.00%

The increase in the additional minimum liability before taxes included in accumulated other comprehensive income totalled $1,343,000 and $352,000 for the years ended December 31, 2004, and 2003, respectively.

The plan’s asset allocations are as follows:

	December 31,
	2004	2003
Equity securities	47%	-%
Debt securities	10	53
Group annuity contract	-	46
Short-term investments	42	-
Other	1	1
Total	100%	100%

The plan’s investment strategy is to obtain a reasonable long-term return consistent with the level of risk assumed and to ensure that sufficient cash is on hand to meet the emerging benefit liabilities. During 2004, the Company changed the plan’s asset allocation targets to the following investment mix: equities – 50%; debt securities – 45%; and cash and equivalents – 5%. The reallocation of plan assets to achieve the new targets was completed in 2005.

The total estimated contribution to the plan for 2005 was $518,000.

The following table illustrates the estimated pension benefit payments, which reflect expected future service, as appropriate, that are projected to be paid:

Year	Estimated Benefit Payments
	(In thousands)
2005	$       1,328
2006	$       1,315
2007	$          973
2008	$          705
2009	$       1,155
Years 2010 through 2014	$       2,665

B. ILCO

ILCO maintains a retirement plan (“ILCO Pension Plan”) covering substantially all employees of the Company and its subsidiaries. The ILCO Pension Plan is a non-contributory, defined benefit pension plan, which covers each eligible employee who has attained 21 years of age and has completed one year or more of service. Each participating subsidiary company contributes an amount necessary (as actuarially determined) to fund the benefits provided for its participating employees.

The ILCO Pension Plan’s basic retirement income benefit at normal retirement age is 1.57% of the participant’s average annual earnings less 0.65% of the participant’s final average earnings up to covered compensation multiplied by the number of his/her  

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years of credited service. For participants who previously participated in the ILCO Pension Plan maintained by ILCO for the benefit of former employees of the IIP Division of CIGNA Corporation (the IIP Plan), the benefit formula described above applies to service subsequent to May 31, 1996. With respect to service prior to that date, the benefit formula provided by the IIP Plan is applicable, with certain exceptions applicable to former IIP employees who are classified as highly compensated employees.

Former eligible IIP employees commenced participation automatically. The ILCO Pension Plan also provides for early retirement, postponed retirement, and disability benefits to eligible employees. Participant benefits become fully vested upon completion of five years of service, as defined, or attainment of normal retirement age, if earlier. A detail of plan disclosures, based on a measurement date of December 31 for each year, is provided below.

A curtailment occurred on December 31, 2004 when the plan was amended to freeze accrued benefits for all participants except for Rule of 68 Non-Highly Compensated Employees (NHCEs). (A Rule of 68 Participant is a Participant who was an Employee on December 31, 2004 and for whom the sum of the Participant’s age in years and fractions thereof and service in years and fractions thereof was greater than or equal to 68 years as of December 31, 2004. A Rule of 68 NHCE is a Rule of 68 Participant who was not a Highly Compensated Employee, as defined under IRC Section 414(q), as of December 31, 2004.) Because the plan’s unrecognized losses exceeded the decrease in PBO caused by the curtailment as of December 31, 2004, the SFAS No. 88 curtailment charge recognized in the 2004 expense was zero.

The pension costs for the ILCO Pension Plan include the following components:

	Year Ended December 31,
	2004	2003	2002
	(In thousands)
Service cost for benefits earned during the period	$             582	$              512	$              544
Interest cost on projected benefit obligation	1,134	1,100	1,023
Expected return on plan assets	(1,368)	(828)	(1,360)
Amortization of unrecognized (gains)/losses	175	110	93
Amortization of unrecognized prior service cost	-	-	-
Net periodic benefit cost	$             523	$              894	$              300

Weighted-average assumptions used to determine net periodic benefit cost:

	Year Ended December 31,
	2004	2003	2002
Discount rate	6.25%	6.75%	7.25%
Expected long-term return on plan assets	8.00%	4.75%	8.00%
Rate of compensation increase	4.00%	5.00%	5.00%

The Plan Sponsor employs a building block approach in determining the expected long-term rate of return on plan assets. Historical markets are studied and long-term historical relationships between equities and fixed-income are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term market assumptions are determined. The long-term portfolio return is established via a building block approach with proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed to check for reasonability and appropriateness.

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The following summarizes the obligations and funded status of the ILCO Pension Plan:

			December 31,
			2004	2003
			(In thousands)
Change in benefit obligation:
	Benefit obligation at beginning of period		$         18,128	$         16,372
		Service cost	582	512
		Interest cost	1,134	1,100
		Benefits paid	(673)	(627)
		(Gain)/loss due to experience	1,419	771
		Curtailments	(2,429)	-
	Benefit obligation at end of year		18,161	18,128
Change in plan assets:
	Fair value of plan assets at beginning of year		17,490	17,814
		Actual return on plan assets	778	303
		Employer contributions	-	-
		Benefits paid	(673)	(627)
	Fair value of plan assets at end of year		17,595	17,490
Funded status:
	Funded status at end of year		(566)	(638)
		Unrecognized prior service cost	-	-
		Unrecognized actuarial net loss	3,621	4,215
	Prepaid benefit cost at end of year		$           3,055	$           3,577
Amounts recognized in the consolidated balance sheets consist of:
	Prepaid benefit cost		$                -	$           3,577
	Accrued benefit cost		(303)	-
	Intangible asset		-	-
	Accumulated other comprehensive income		3,358	-
	Net amount recognized		$           3,055	$            3,577
			December 31,
			2004	2003
			(In thousands)
Projected benefit obligation			$         18,161	$          18,128
Accumulated benefit obligation			$         17,898	$          15,917
Fair value of plan assets			$         17,595	$          17,490

Weighted average assumptions used to determine benefit obligations:

	Year Ended December 31,
	2004	2003
Discount rate	5.75%	6.25%
Rate of compensation increase	3.75%	4.00%

The increase in the additional minimum liability before taxes included in accumulated other comprehensive income totalled $3,358,000 for the year ended December 31, 2004. No additional minimum liability was required for 2003.

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The plan’s asset allocations are as follows:

	December 31,
	2004	2003
Equity securities	35%	-%
Debt securities	27	27
Group annuity contract	-	36
Short-term investments	38	36
Other	-	1
Total	100%	100%

The plan’s investment strategy is to obtain a reasonable long-term return consistent with the level of risk assumed and to ensure that sufficient cash is on hand to meet the emerging benefit liabilities. During 2004, the Company changed the plan’s asset allocation targets to the following investment mix: equities – 65%; debt securities – 30%; and cash and equivalents – 5%. The reallocation of plan assets to achieve the new targets was completed in 2005.

The total estimated contribution to the plan for 2005 was zero.

The following table illustrates the estimated pension benefit payments, which reflect expected future service, as appropriate, that are projected to be paid:

Year	Estimated Benefit Payments
	(in thousands)
2005	$       1,009
2006	$       1,032
2007	$       1,122
2008	$       1,275
2009	$       1,313
Years 2010 through 2014	$       6,637

Savings and Investment Plan

ILCO maintains a savings and investment plan (“401(k) Plan”) that allows eligible employees who have met a one-year service requirement to make contributions to the 401(k) Plan on a tax-deferred basis. A 401(k) Plan participant may elect to contribute up to 16% of eligible earnings on a tax deferred basis, subject to certain limitations applicable to “highly compensated employees” as defined in the Internal Revenue Code. 401(k) Plan participants may allocate contributions, and earnings thereon, between investment options selected by participants. The Account Balance of each Participant attributable to employee contributions is 100% vested at all times.

The 401(k) Plan allows for a matching contribution. The match, which was in the form of shares of ILCO common stock, prior to the acquisition of the remaining outstanding common stock of ILCO by FIC on May 18, 2001, and is in the form of FIC common stock thereafter, is equal to 100% of an eligible participant’s elective deferral contributions, as defined in the 401(k) Plan, not to exceed a maximum percentage of the participant’s plan compensation. The maximum percentage is 2%. Allocations are made on a quarterly basis to the account of participants who have at least 250 hours of service in that quarter. The costs recognized by the Company relating to the 401(k) Plan totalled $118,000, $147,000, and $122,000 for the years ended December 31, 2004, 2003, and 2002, respectively.

Effective January 1, 2005, the 401(k) Plan was amended to add a provision whereby the Employer will contribute each year an amount equal to 3.5% of eligible participants’ compensation for the plan year. These contributions are not conditioned on any requirement other than that the employee be eligible to make elective deferrals under the plan for any part of the year. Participants  

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will always be 100% vested in these contributions. For the plan year beginning January 1, 2006, the employer contribution will be made on a discretionary basis. Further, employer matching contributions will be made in the form of cash instead of FIC common stock. The employer matching contribution will continue to be equal to 100% of participants’ contributions to the 401(k) Plan up to 2% of the participants’ total compensation.

ILCO maintained an Employee Stock Ownership Plan (“ESOP Plan”) and a related trust for the benefit of its employees and Family Life employees. The ESOP Plan generally covered employees who had attained the age of 21 and had completed one year of service. Vesting of benefits to employees was based on number of years of service. Effective May 1, 1998, the 401(k) Plan was amended to provide for the merger of the ESOP Plan into the 401(k) Plan. In connection with the merger, certain features under the ESOP Plan were preserved for the benefit of employees previously participating in the ESOP Plan with regard to all benefits accrued under the ESOP Plan through the date of merger. The merger was effected on December 26, 2001. At December 31, 2004, the 401(k) Plan had a total of 346,555 shares of FIC stock, which are allocated to participants.

401(k) Plan shares are treated as issued and outstanding in calculating the Company’s earnings per share. Dividends to shareholders in the 401(k) Plan are treated by the Company as dividends to outside shareholders and are a direct charge to retained earnings.

Stock Option Plans

A. ILCO Stock Option Plan

Under ILCO’s 1999 Non-qualified Stock Option Plan (the “ILCO Stock Option Plan”) options to purchase shares of ILCO’s common stock were granted to certain employees of ILCO, its subsidiaries, and affiliates. The ILCO Stock Option Plan became effective on May 18, 1999 (the “Effective Date”). The exercise price of the options is equal to 100% of the fair market value on the date of grant, but in no case less than $7.50 per share ($6.818 per share as adjusted for the exchange ratio in the merger). A portion of the options become exercisable on the next anniversary of the Effective Date following the date of grant. No options may be exercised after the sixth anniversary of the Effective Date. All options must be exercised in one year from the date the options become exercisable. The number of options that become exercisable on each anniversary of the Effective Date, prior to the sixth anniversary, is equal to 100% of the total options granted divided by the number of years between the next anniversary of the Effective Date following the date of grant and the sixth anniversary of the Effective Date.

Subsequent to May 18, 2001, each share of ILCO common stock issuable pursuant to outstanding options was assumed by the Company and became an option to acquire FIC common stock. The number of shares and the exercise price were adjusted for the exchange ratio in the merger . The related charge was included in equity as deferred compensation. In 2002, 33,000 options were granted at prices ranging from $13.42 to $14.00, 42,350 were cancelled and 119,650 were exercised. In 2003, no options were granted, 48,616 were cancelled and 160,234 were exercised. As of December 31, 2004 and 2003, there are no options outstanding and no options available to be granted.

The following table summarizes activity under ILCO’s Stock Option Plan for the years ended December 31, 2004 and 2003:

			Weighted		Weighted		Weighted
			Average		Average		Average
		2004	Exercise	2003	Exercise	2002	Exercise
		Options	Price	Options	Price	Options	Price
		(In thousands, except option prices/values)
Outstanding at beginning of year		-	$            -	209	$      9.51	338	$       8.76
Granted		-	-	-	-	33	13.74
Exercised		-	-	(160)	8.64	(120)	8.56
Cancelled		-	-	(49)	12.39	(42)	9.52
Outstanding at end of year		-	$            -	-	$           -	209	$       9.51
Options exercisable at end of year		-	$            -	-	$           -	209	$       9.51
Weighted average fair value of options
	granted during the year		$            -		$           -		$      2.09

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B. FIC Stock Option Plan

The Company has a qualified stock option plan for officers and key employees. The aggregate amount of the common shares on which options may be granted is limited to 200,000 shares. The option price will not be less than 100% of the fair market price of the optioned shares on the date the option is granted. As of December 31, 2004, no options had been granted under the FIC Stock Option Plan.

C. Stock Appreciation Rights Granted in 2002

On November 4, 2002, FIC adopted an Equity Incentive Plan (the “Plan”). The purpose of the Plan is to provide motivation to key employees of the Company and its subsidiaries to put forth maximum efforts toward the continued growth, profitability, and success of the Company and its subsidiaries by providing incentives to such key employees through performance-related incentives, including, but not limited to, the performance of the common stock of the Company. Toward this objective, stock appreciation rights or performance units may be granted to key employees of the Company and its subsidiaries on the terms and subject to the conditions set forth in the Plan. On November 4, 2002, the Company granted stock appreciation rights (“SARs”) with respect to 30,000 shares of the common stock of the Company, pursuant to terms and provisions of the Plan. The exercise price of each unit is $14.11, which was 100% of the fair market value of the common stock of the Company on the date of such grant. All 30,000 SARs were exercised in 2003.

D. Stock Options Granted During 2003

In consideration of the role that American Physicians Service Group, Inc. (“APS”) served in having brought the opportunity to acquire the New Era companies (see Note 17) to FIC and APS’s intention to actively assist in promoting FIC’s business plan, FIC granted to APS an option to acquire up to 323,000 shares of common stock at a per share exercise price equal to $16.42 per share, but only if “Qualifying Premiums” for the “Determination Period” exceed $200 million. The Qualifying Premiums requirement refers, with certain exceptions, to the amount of premiums for life insurance and annuity products marketed through FICFS, the newly-established subsidiary of FIC that purchased the New Era companies and includes premiums received by FIC’s life insurance subsidiaries in connection with the Equita Marketing Agreement. The Determination Period means the period beginning on July 1, 2003, and ending on December 31, 2005. Unless earlier exercised, the option expires on December 31, 2006. The fair value of the options at the date the Qualifying Premium targets, if met, are achieved, will be recognized as expense at that date in accordance with SFAS No. 123, and Emerging Issues Task Force Issue No. 96-18 (“EITF 96-18”), “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

In consideration of the role that Equita served in having brought the opportunity to acquire the New Era companies to FIC and Equita’s intention to assist FIC in the implementation of its business plan, FIC granted to Equita an option to acquire up to 169,000 shares of common stock at a per share exercise price equal to $16.42 per share, but only if “Qualifying Premiums” for the “Determination Period” exceed $200 million. The definitions of Qualifying Premiums and Determination Period are the same as those for the option granted to APS with respect to the base option only. In addition, FIC granted to Equita an additional option to purchase up to 158,000 shares of common stock at a per share exercise price equal to $16.42 per share, but only at the rate of 10,000 shares for each $10 million increment by which Qualifying Premiums for the Determination Period exceed $200 million. Unless earlier exercised, the options granted to Equita expire on December 31, 2006. The fair value of the options at the date the Qualifying Premium targets, if met, are achieved will be recognized as expense at that date in accordance with SFAS No. 123 and EITF 96-18.

FIC granted to William P. Tedrow an option to purchase up to 150,000 shares of common stock at a per share exercise price of $13.07, but only if “Qualifying Premiums” for the “Determination Period” exceed $200 million. The definitions of Qualifying Premiums and Determination Period are the same as those for the option granted to APS described above. Unless earlier exercised, the options expire on December 31, 2006, or earlier in the event of the termination of Mr. Tedrow’s employment for cause or if he terminates his employment without good cause. The options granted to Mr. Tedrow are being accounted for in accordance with APB Opinion No. 25 and Financial Accounting Standards Board (“FASB”) Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, an interpretation of APB Opinions No. 15 and 25.” No expense related to the options granted to Mr. Tedrow was recognized for the year ended December 31, 2003. These options were cancelled upon the termination of Mr. Tedrow’s employment in March 2004.

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E. Stock Options Granted During 2004

No stock options were granted during 2004.

12. Lease Commitments

The Company and its subsidiaries have entered into lease agreements for office space and equipment which expire at various dates through March 2008. Certain office space leases may be renewed at the option of the Company.

In 1985, the Company entered into a sale/leaseback transaction with a third party for an office building. The leaseback term expires in December 2005, and requires an annual base rent of $798,000 effective January 1, 2004. In addition, the Company is required to pay maintenance, taxes, insurance, and utilities, and subleases this office space to various third parties. As of December 31, 2003, the Company accrued a $2.0 million estimated net loss from the operation of this building representing the annual base rental amount plus estimated operating expenses through December 2005, reduced by estimated sublease income. The estimated future losses were accrued in 2003 as management determined that there were no prospects for significant additional subleasing of the building and future losses would not be avoidable.

At December 31, 2004 and 2003, the remaining deferred gain on the sale of the building was $151,000 and $302,000, respectively, which is being amortized through December 2005.

The Company recorded rent expense of $368,000 in 2004. Rent expense was $955,000 (in addition to the loss described above) and $1.4 million in 2003 and 2002, respectively. As of December 31, 2004, minimum annual rentals under noncancellable leases are as follows (in thousands):

2005	$      1,038
2006	120
2007	34
2008	2
2009	-
Thereafter	-
Total	$       1,194

The Company occupies approximately 81,000 square feet in the River Place Pointe office complex. As described more fully in Note 18, the Company sold River Place Pointe subsequent to December 31, 2004, and also entered into a lease agreement for one of the buildings in the office complex.

13. Related-Party Transactions

Mitte Foundation

In January 2002 the Company donated $1 million to the Roy F. and Joann Cole Mitte Foundation (the “Foundation”). The Foundation is a charitable entity exempt from federal income tax under section 501(a) of the Code as an organization described in section 501(c)(3) of the Code, and owns 9.84% of the outstanding shares of FIC’s common stock as of December 31, 2004. The sole members of the Foundation are Roy F. Mitte, former Chairman, President and Chief Executive Officer of the Company, and his wife, Joann Cole Mitte.

Sale of Actuarial Risk Consultants, Inc.

On December 31, 2003, FIC through ILCO sold Actuarial Risk Consultants, Inc. (“ARC”), an actuarial consulting subsidiary which it had established in December 2002. The sale of ARC was to George M. Wise, III, who was Vice President and Chief Financial Officer of FIC. The consideration for the transaction was $10,000. Prior to the closing, all intercompany payables owed by ARC to the Company were satisfied in full, and certain tangible and intangible assets used by ARC in connection with the operation of its business were assigned to ARC.

On December 31, 2003, Mr. Wise and FIC entered into an amendment to Mr. Wise’s employment agreement. The amendment provided that the term of the agreement would end on March 31, 2004, instead of December 31, 2005. Mr. Wise agreed to continue as Chief Financial Officer of FIC until March 31, 2004. As mutually agreed, Mr. Wise actually served as Chief Financial Officer until April 26, 2004. Under the amendment, Mr. Wise received a severance payment of $310,000, one-half of which was  

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paid in January 2004, and the balance on March 31, 2004. In connection with the amendment, Mr. Wise released FIC from certain claims he may have, including claims related to matters arising out of his employment agreement or his employment relationship with FIC.

Also, in connection with the sale of ARC to Mr. Wise, FIC entered into a consulting agreement with ARC. Under the terms of the agreement, FIC and its insurance subsidiaries could (but were not obligated to) obtain up to 2,000 hours of actuarial consulting services from ARC during the period from January 1, 2004, to December 31, 2005. During 2004 and 2005, the Company paid fees of approximately $1.16 million and $0.84 million, respectively, to ARC in connection with the provision of actuarial consulting services for the specified hours at the discounted rate stated in the agreement, including services related to the Company’s review of deferred policy acquisition costs and present value of future profits of acquired businesses.

Consulting Arrangement with William P. Tedrow

William P. Tedrow, who served as a vice president of the Company from June 2003 to March 2004, provided consulting services to the Company during the period from January 2003 to May 2003. These services related to the development of the business plan that led, in June 2003, to the purchase of the New Era companies and the marketing arrangement with Equita. In connection with such consulting services, Mr. Tedrow received fees of $94,361 and reimbursement of expenses in the amount of $8,925.

14. Commitments and Contingencies

Mitte Settlement

In 2002, the Company filed a lawsuit against Roy F. Mitte (“Mitte”), The Roy F. and Joann Cole Mitte Foundation (the “Foundation”), and Joann Mitte (collectively referred to as the “Defendants”). Mitte was the Chairman, President and Chief Executive Officer of FIC until he was placed on administrative leave in August, 2002. The administrative leave, and the subsequent action by the Board of Directors in October, 2002, to terminate the employment agreement between the Company and Mitte, resulted from an investigation conducted by the FIC Audit Committee. Subsequent to the filing of the lawsuit, Mitte filed a counterclaim against the Company alleging that the Company breached the employment agreement between the Company and Mr. Mitte by refusing to pay Mitte the severance benefits and compensation provided for under the employment agreement and amended thereto.

On May 15, 2003, the Company entered into a settlement agreement with the Defendants and Scott Mitte (a director of the Company and the son of Roy Mitte) (the “Mitte Parties”). Under the terms of the agreement the Mitte Parties released the Company from any past, present or future claims which they may have against the Company, including any claims which Roy Mitte may assert under his employment agreement. In addition, the Company agreed to release the Mitte Parties from any past, present or future claims which the Company may have against the Mitte Parties.

The settlement provides for payments aggregating $3 million by the Company to Roy Mitte in equal installments of $1 million on June 1, 2003, June 1, 2004 and June 1, 2005, with a provision for acceleration of payments in the event of a change in control. The settlement agreement also includes provisions whereby, the Company agrees (i) to use reasonable efforts to locate purchasers over a two-year period for 1,552,206 shares of FIC common stock owned by the Foundation at a price of $14.64 per share, (ii) to purchase (or, alternatively, locate a purchaser) on or before June 1, 2003 for 39,820 shares of FIC common stock owned by Roy Mitte and 35,520 shares of common stock held in the ESOP account of Roy Mitte, at a price of $14.64 per share. The agreement also includes provisions related to the continuation of health insurance of Roy and Joann Mitte and payment for the cancellation of options held by Roy Mitte to purchase 6,600 shares of FIC common stock. The Company has recognized a charge of $2.9 million in 2003 for the discounted amounts to be paid under the settlement agreement, which is reflected in the consolidated statement of operations as litigation settlement.

As a condition of the obligations of the Company under the settlement agreement, the Mitte Parties agreed to grant a limited proxy to the persons named as proxies by FIC in any proxy statement filed by FIC with the SEC. With respect to the future shareholders meetings, the proxy may be voted “for” all nominees for the Board of Directors named on FIC’s proxy statement, “against” any proposal by a person other than FIC for the removal of any members of the Board of Directors, “withheld” as to nominees for the Board of Directors proposed by any person other than FIC and “against” any proposal by any person other than FIC to amend the bylaws or articles of FIC. The proxy also extends to certain matters which may be proposed by FIC at the 2004 annual meeting of shareholders, or any later annual or special meeting, regarding changes in the ownership percentage required in order for a shareholder to call a special meeting of shareholders and the elimination of cumulative voting. The granting of the proxy is generally conditioned upon the performance of the scheduled purchases of the shares of FIC common stock owned by the Foundation. 

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T. David Porter v. Financial Industries Corporation

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

Litigation with Otter Creek Partnership I, L.P.

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

In connection with this solicitation of proxies, on June 13, 2003, Otter Creek Partners commenced a lawsuit in the District Court in Travis County, Texas, Cause No. GN302872 (the “Litigation”) seeking, among other things, to compel the Company to hold the previously delayed 2003 Annual Meeting. Otter Creek also sought in the Litigation to neutralize the effect of a proxy obtained by the Company from the Mitte Family (the “Mitte Proxy”) the preceding month whereby the incumbent board was able to vote 1,627,610 shares in favor of its nominees.

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

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

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

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Litigation with Former Employee of Subsidiary

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

In November 2003, Mr. Johnson and his wife, Carol Johnson, filed suit in Harris County, Texas District Court against the Company, FIC Financial Services, Inc. (“FICFS”) and an employee of the Company. The suit, which sought an unspecified amount of damages and injunctive relief, alleges that the defendants interfered with the non-JNT contract and business relationships of the plaintiffs, made slanderous statements regarding the plaintiffs, and accessed computer files at the JNT offices relating to the non-JNT business relationships of the plaintiffs, without the consent of the plaintiffs. The suit also alleged conspiracy, conversion, and various other torts, all related to the defendants’ investigation of plaintiff’s business practices at JNT.

Subsequently, Mr. Johnson filed a demand for arbitration under his employment agreement, which has a mandatory arbitration clause. In the arbitration, Mr. Johnson sought damages for breach of contract and various other benefits relating to the termination of his employment contract, totaling $913,133.40. In connection with the arbitration, FIC submitted a counter-claim, alleging that Mr. Johnson committed multiple breaches of his employment agreement, and that he breached his fiduciary duty to FIC as a result of his actions in conducting the business of JNT, thereby entitling FIC to a dismissal of plaintiff’s claims. Prior to the hearing on the arbitration, the Harris County Court ordered that the matters raised in that lawsuit by Mr. Johnson (though not Carol Johnson) be combined with the arbitration.

An arbitration hearing on Johnson’s contract claims was conducted in April 2005. On July 21, 2005, the Arbitrator issued an interim award in which he denied all of Johnson’s claims for breach of contract, as well as Johnson’s claims with respect to the restricted shares of FIC stock. In denying Johnson’s claims, the Arbitrator concluded that:

(1) Johnson had committed multiple and material breaches of his employment agreement by operating a personal tax and accounting business out of office space and using employees, utilities and other items, all paid for by FICFS; by engaging in a self-dealing transaction involving the payment to himself of $25,000 out of funds held by JNT in a suspense account, an account to which JNT owed fiduciary duties to its customers and clients; and by firing an employee of JNT on the same day that the employee inquired about possible workers compensation benefits in connection with an on-the-job injury,

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

(3) the change in the majority of the Board of Directors of FIC resulting from the 2003 Annual Meeting of FIC’s shareholders did not constitute a “change of control” under Johnson’s employment agreement, thereby denying Johnson’s claim that he was entitled to a “good reason” termination of his employment agreement.

In addition, the Arbitrator awarded FICFS $28,000, plus interest at the rate of 6% per annum from July 21, 2005, to the date of payment, with respect to Johnson’s unauthorized conversion of funds held in the JNT suspense account. The order confirming the arbitration award was signed on February 27, 2006, by the Harris County district judge and the Company is currently pursuing collection of the judgment. No amounts have been recorded in the Company’s consolidated financial statements for such judgment.

With respect to the matters raised by Mr. Johnson in the Harris County lawsuit, which were referred by the Court to the arbitration, following his loss in the arbitration of the employment agreement, Mr. Johnson notified the Arbitrator that he would not pursue arbitration of his other claims. In addition, in May 2006, Mrs. Johnson filed a notice of non-suit with respect to the claims made by her in the Harris County lawsuit. Accordingly, this matter is now closed.

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Litigation with Equita Financial and Insurance Services of Texas, Inc. and M&W Insurance Services, Inc.

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

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

At a hearing on December 20, 2005, the Company was successful in the intervention of Family Life and Investors Life, which allows the companies to introduce evidence in the case. The parties are currently undergoing the discovery phase of the litigation.

The Company believes that the allegations in this lawsuit are entirely without merit. The Company further believes that Equita has breached its obligations under the provisions of the Marketing Agreement pertaining to the distribution of insurance products of the Company’s insurance subsidiary, thereby causing damages to the Company and forfeiting Equita’s entitlement to the option rights under the Option Agreement.

The Company intends to vigorously oppose the lawsuit and is weighing all of its options including, but not limited to, asserting counterclaims against the plaintiffs.

Shareholder Claim

The Company received a demand letter in April 2004 from a law firm representing an individual shareholder (Mr. Cook) who owns 530 shares of the Company’s common stock, which letter set forth certain allegations and notified the Registrant that the shareholder intended to file a shareholder derivative lawsuit (the “Demand Letter”). In May 2004, FIC, by and through its Special Litigation Committee, filed a petition in the 250th District Court of Travis County, Texas (the “Court”), seeking to have the Court appoint a panel of independent and disinterested persons pursuant to Section H (3) of Article 5.14 of the Texas Business Corporation Act to investigate the allegations, and stay any shareholder derivative actions. Subsequently, on June 1, 2004, the Court issued an Order appointing Eugene Woznicki, Kenneth S. Shifrin, John D. Barnett and F. Gary Valdez as a panel of independent and disinterested persons (the “Panel”) to make determinations contemplated by Section F of Article 5.14 of the Texas Business Corporation Act in connection with the Demand Letter and staying any shareholder derivative actions relating to the letter until the Panel’s review was completed and a determination was made by the panel as to what, if any, further action was to be taken. Messrs. Woznicki, Shifrin and Barnett are independent directors of FIC. Mr. Valdez is neither a director nor an employee of FIC. Mr. Valdez is the founder and president of Focus Strategies, L.L.C. and is active in various community and civic organizations in the Austin, Texas area.

Following an extensive review of the claims made by the individual shareholder, the Panel, in January 2005, filed with the court a Petition for Declaratory Judgment pursuant to the Texas Declaratory Judgments Act and Article 5.14 of the Texas Business Corporations Act (the “Petition”). The Petition describes the process used by the Panel and its counsel in considering the matters raised in the Demand Letter and the submittal provided by counsel for the shareholder. The Petition advised the Court that, after consideration of the evidence obtained through its inquiry, the Panel had unanimously made a good faith determination that the continuation of the Committee's derivative proceeding and the

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commencement of any further derivative proceedings based on the allegations made by the individual shareholder was not in the best interests of FIC.

On October 10, 2005, the 250th District Court of Travis County, Texas, heard for trial on the merits the matters raised by the Panel in the Petition (Financial Industries Corporation v. Tom Cook (Cause No. GN 401513). After consideration of the pleadings, evidence and authorities submitted by counsel for the Company, the Court issued a Final Judgment on October 10, 2005, in which it ruled that the determinations made by the Panel, as reflected in a report submitted to the Court by a Special Litigation Committee appointed by the Registrant’s Board of Directors, were made: (1) in good faith, (2) after the Panel conducted a reasonable inquiry, and (3) based on the factors deemed appropriate under the circumstances by the Panel. The Court’s ruling otherwise dismissed with prejudice the derivative proceedings involved in this matter. The Final Judgment was approved as to form and substance by counsel for the Registrant and by counsel for the defendant.

Other Litigation

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

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

15. Earnings Per Share

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

			Year Ended December 31,
				2003	2002
			2004	Restated	Restated
			(In thousands, except per share amounts)
Numerator:
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle		$       (14,567)	$        (17,450)	$         (9,005)
Denominator:
	Weighted average common shares outstanding:
		Basic	9,796	9,667	9,555
		Common stock options	-	-	-
		Repurchase of treasury stock	-	-	-
		Diluted	9,796	9,667	9,555
Per share:
		Basic	$           (1.48)	$          (1.81)	$           (0.94)
		Diluted	$           (1.48)	$          (1.81)	$           (0.94)

Options to purchase 650,000 shares of common stock at a price of $16.42 were outstanding at December 31, 2004, but were not included in the computation of diluted earnings per share because the inclusion would result in an anti-dilutive effect in periods in which a loss from continuing operations was incurred. Options to purchase 800,000 shares of common stock at prices ranging from $13.07 to $16.42 were outstanding at December 31, 2003, but were not included in the computation of diluted earnings per share because the inclusion would result in an anti-dilutive effect in periods in which a loss from continuing operations was incurred. Options to purchase 208,850 shares of common stock at prices ranging from $8.18 to $14.30 were outstanding at December 31, 2002, but were not included in the computation of diluted earnings per share because the inclusion would result in an anti-dilutive effect in periods in which a loss from continuing operations was incurred.

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16. Business Concentration

One of the Company’s insurance subsidiaries, Family Life, provides mortgage protection life, disability, and accidental death insurance to mortgage borrowers of financial institutions. For marketing purposes, a significant number of these financial institutions provide Family Life with customer lists. In 2004, premium income from these products was derived from 49 states and the District of Columbia with concentrations of approximately 21% and 30% in California and Texas, respectively. In 2003, these amounts were 23% and 29%, respectively.

The Company’s other insurance subsidiary, Investors Life, also markets individual traditional life, universal life, and annuity products in 49 states, the District of Columbia, and the U.S. Virgin Islands with concentrations of approximately 13%, 8% and 8% in Pennsylvania, California, and Ohio, respectively, for 2004. For 2003, these concentrations were 14%, 8% and 8% for Pennsylvania, California, and Ohio.

17. Discontinued Operations

The Company acquired Paragon Benefits, Inc., The Paragon Group, Inc., Paragon National, Inc., Total Consulting Group, Inc., and JNT Group, Inc. (collectively the “New Era companies”) in June, 2003, for approximately $4.2 million in cash and 47,395 shares of FIC common stock with a fair market value of $646,000. The New Era companies consulted in the design of planned benefit programs for secondary school systems, provided administrative services for the related plans, insurance brokerage services to plan participants, and investment advisory services for such plans and other clients. In connection with the acquisition, the six principals of the New Era companies entered into three-year and five-year employment agreements under which they would receive FIC stock, with a market value of approximately $2.4 million on the date of the agreements, during the term of their employment. The purchase price of the New Era companies and the grants of stock pursuant to the employment contracts were not tied to the future performance of the New Era companies.

The purchase price paid for the New Era companies (including transaction fees and excluding contingent consideration amounts accounted for as compensation as described above) was $4.9 million. The acquisition of the New Era companies was accounted for in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”). This statement required that FIC estimate the fair value of assets acquired and liabilities assumed as of the date of the acquisition and allocate the purchase price to those assets and liabilities. The purchase price was allocated as follows: $116,000 to cash, $158,000 to agency advances and other receivables, $288,000 to property, plant and equipment, $28,000 to other assets, $182,000 to other liabilities, and $4.5 million to goodwill and other intangibles (included in other assets).

The performance of the New Era companies after the acquisition was substantially below expectations and after reviewing their long-term prospects the Company determined to sell them. On December 31, 2003, the New Era companies were sold to five of the original principals for nominal consideration and the cancellation of their employment agreements. (The employment contract of the sixth principal was terminated earlier in 2003.) In connection with these cancellations, the five principals each received a payment of $10,000 from the Company and the FIC common stock granted pursuant to those agreements, with a market value of approximately $2.1 million at December 31, 2003, reverted to the Company.

The loss from operations of the New Era companies for the period from acquisition through December 31, 2003, was $1.2 million. The Company also incurred a loss of $4.9 million on the sale of the New Era companies. These losses and the aggregate $50,000 in cancellation payments to the principals totalled $6.1 million, which is recorded as a loss from discontinued operations in the accompanying consolidated statement of operations.

18. Subsequent Events

Sale of Real Estate

On June 1, 2005, the Company sold the River Place Pointe office complex to a non-affiliated party in an all-cash transaction for a gross purchase price of $103 million. The office complex is located in Austin, Texas, as more fully described in Note 3. Under the terms of the sale agreement, the Company entered into a lease with the purchaser with respect to all of the space in Building One for a five-year term at a rate of $28.00 per square foot, which was the prevailing rental rate at the time that FIC and its subsidiaries occupied the building in July 2000. The lease provides the Company with a right of cancellation of the lease at March 31, 2008. The Company will realize a gain of $10.1 million on the sale, which includes both a current 2005 realized gain of $8.0 million and a deferred gain of $2.1 million to be recognized over the period from the sale date through March 31, 2008.

At December 31, 2004, the Company had $589,000 of real estate available for sale, consisting of six properties. Three of these properties were sold in 2005 and the remaining three properties were sold in early 2006. Realized gains on the sales totaled $761,000 and $517,000  in 2005

and 2006, respectively.

F-57

Amendment of Subordinated Loans

As previously described in Note 10, FIC and FLC have subordinated notes payable to Investors Life with an unpaid balance of $15.4 million at December 31, 2004. With the approval of the Texas Department of Insurance, the loans were restructured as of March 9, 2006. As amended, the loans provide for a one year moratorium on principal payments for the period from March 12, 2006, to December 12, 2006, with principal payments to resume on March 12, 2007, with ten equal quarterly principal payments until the maturity date of June 12, 2009. These notes have been eliminated in the consolidated financial statements.

19. Quarterly Financial Data (Unaudited)

Previously reported unaudited quarterly financial data has been restated for the effects of the adjustments described in Note 2 to the extent applicable, as follows:

		Three Months Ended
		March 31,
			2003
		2004	As Previously Reported	As Restated
		(In thousands, except per share data)
Total revenues		$         28,872	$         30,268	$           30,019
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	$         (2,500)	$         (2,637)	$           (2,766)
Discontinued operations		-	-	-
Loss before cumulative effect of
	change in accounting principle	(2,500)	(2,637)	(2,766)
Cumulative effect of change in accounting principle		229	-	-
Net loss		$         (2,271)	$           (2,637)	$          (2,766)
Basic earnings per share:
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	$           (0.25)	$             (0.27)	$            (0.29)
Discontinued operations		-	-	-
Loss before cumulative effect of
	change in accounting principle	(0.25)	(0.27)	(0.29)
Cumulative effect of change in accounting principle		0.02	-	-
Net loss		$           (0.23)	$           (0.27)	$             (0.29)
Diluted earnings per share:
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	$           (0.25)	$             (0.27)	$            (0.29)
Discontinued operations		-	-	-
Loss before cumulative effect of
	change in accounting principle	(0.25)	(0.27)	(0.29)
Cumulative effect of change in accounting principle		0.02	-	-
Net loss		$           (0.23)	$             (0.27)	$            (0.29)

F-58

		Three Months Ended
		June 30,
			2003
		2004	As Previously Reported	As Restated
		(In thousands, except per share data)
Total revenues		$          24,924	$            29,740	$         29,432
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	$         (3,796)	$         (2,542)	$         (2,517)
Discontinued operations		-	-	(130)
Loss before cumulative effect of
	change in accounting principle	(3,796)	(2,542)	(2,647)
Cumulative effect of change in accounting principle		-	-	-
Net loss		$         (3,796)	$          (2,542)	$         (2,647)
Basic earnings per share:
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	$          (0.38)	$             (0.26)	$           (0.26)
Discontinued operations		-	-	(0.01)
Loss before cumulative effect of
	change in accounting principle	(0.38)	(0.26)	(0.27)
Cumulative effect of change in accounting principle		-	-	-
Net loss		$           (0.38)	$            (0.26)	$           (0.27)
Diluted earnings per share:
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	$          (0.38)	$             (0.26)	$           (0.26)
Discontinued operations		-	-	(0.01)
Loss before cumulative effect of
	change in accounting principle	(0.38)	(0.26)	(0.27)
Cumulative effect of change in accounting principle		-	-	-
Net loss		$          (0.38)	$             (0.26)	$         (0.27)

F-59

		Three Months Ended
		September 30,
			2003
		2004	As Previously Reported	As Restated
		(In thousands, except per share data)
Total revenues		$          24,643	$            27,766	$         26,692
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	$         (4,845)	$         (5,753)	$        (6,398)
Discontinued operations		-	-	29
Loss before cumulative effect of
	change in accounting principle	(4,845)	(5,753)	(6,369)
Cumulative effect of change in accounting principle		-	-	-
Net loss		$        (4,845)	$           (5,753)	$        (6,369)
Basic earnings per share:
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	$           (0.49)	$             (0.60)	$          (0.66)
Discontinued operations		-	-	-
Loss before cumulative effect of
	change in accounting principle	(0.49)	(0.60)	(0.66)
Cumulative effect of change in accounting principle		-	-	-
Net loss		$          (0.49)	$             (0.60)	$          (0.66)
Diluted earnings per share:
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	$          (0.49)	$             (0.60)	$        (0.66)
Discontinued operations		-	-	-
Loss before cumulative effect of
	change in accounting principle	(0.49)	(0.60)	(0.66)
Cumulative effect of change in accounting principle		-	-	-
Net loss		$          (0.49)	$             (0.60)	$          (0.66)

F-60

		Three Months Ended December 31,
			2003
		2004	As Previously Reported	As Restated
		(In thousands, except per share data)
Total revenues		$          24,173	$            23,893	$        25,254
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	$         (3,426)	$            (5,433)	$        (5,769)
Discontinued operations		-	(6,133)	(6,032)
Loss before cumulative effect of
	change in accounting principle	(3,426)	(11,566)	(11,801)
Cumulative effect of change in accounting principle		-	-	-
Net loss		$         (3,426)	$          (11,566)	$      (11,801)
Basic earnings per share:
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	$           (0.35)	$            (0.56)	$          (0.59)
Discontinued operations		-	(0.63)	(0.62)
Loss before cumulative effect of
	change in accounting principle	(0.35)	(1.19)	(1.21)
Cumulative effect of change in accounting principle		-	-	-
Net loss		$           (0.35)	$            (1.19)	$          (1.21)
Diluted earnings per share:
Loss from continuing operations before discontinued operations
	and cumulative effect of change in accounting principle	$           (0.35)	$            (0.56)	$          (0.59)
Discontinued operations		-	(0.63)	(0.62)
Loss before cumulative effect of
	change in accounting principle	(0.35)	(1.19)	(1.21)
Cumulative effect of change in accounting principle		-	-	-
Net loss		$           (0.35)	$             (1.19)	$          (1.21)

F-61

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

SCHEDULE I – SUMMARY OF INVESTMENTS – OTHER THAN

INVESTMENTS IN RELATED PARTIES

			December 31, 2004
					Amount
			Amortized	Fair	Shown on the
			Cost	Value	Balance Sheet
			(In thousands)
Type of Investment:
Fixed maturity securities:
	United States Government and government
		agencies and authorities	$        39,085	$        39,493	$        39,493
	States, municipalities and political subdivisions		16,720	16,585	16,585
	Corporate		252,449	256,579	256,579
	Mortgage-backed and asset-backed		192,447	186,498	186,498
	Total fixed maturity securities available for sale		500,701	499,155	499,155
	Fixed maturity securities held for trading		1,057	1,057	1,057
Total fixed maturity securities			501,758	500,212	500,212
Equity securities			6,311	8,502	8,502
Policy loans			39,855	49,343	39,855
Invested real estate			76,580	N/A	76,580
Real estate held for sale			589	N/A	589
Short-term investments			62,514	62,514	62,514
Total investments			$       687,607		$       688,252

F-62

FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)

SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS

		December 31,
		2004	2003 Restated
		(In thousands)
ASSETS
Cash and cash equivalents		$              167	$         1,696
Short-term investments		707	-
Investments in subsidiaries*		119,981	136,035
Intercompany receivables*		7,945	7,430
Accounts receivable		1	368
Other assets		542	766
Total assets		$      129,343	$     146,295
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Subordinated notes payable*		2,005	2,205
Notes payable		15,000	15,000
Intercompany payables*		-	-
Other liabilities		3,235	3,194
Total liabilities		20,240	20,399
Shareholders’ equity:
Common stock, $.20 par value, 25,000,000 shares authorized in 2004 and 2003;
	12,516,841 shares issued in 2004 and 2003; 9,804,009
	and 9,791,024 shares outstanding in 2004 and 2003	2,504	2,504
Additional paid-in capital		70,398	70,391
Accumulated other comprehensive income (loss)		(4,667)	(2,121)
Retained earnings (including $108,341 and $119,418 of undistributed
	earnings of subsidiaries at December 31, 2004 and 2003)	42,650	56,988
Total shareholders’ equity before treasury stock		110,885	127,762
Common treasury stock, at cost, 409,233 and 422,218 shares in 2004 and 2003**		(1,782)	(1,866)
Total shareholders’ equity		109,103	125,896
Total liabilities and shareholders’ equity		$     129,343	$     146,295

* Eliminated in consolidation in 2004 and 2003.

** Excludes $21.6 million of FIC stock owned by subsidiaries at December 31, 2004 and 2003.

F-63

FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)

SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF OPERATIONS

		Year Ended December 31,
		2004	2003 Restated	2002 Restated
		(In thousands)
Income		$                 8	$          176	$            12
Expenses:
	Operating expenses	2,650	4,456	2,000
	Interest expense	990	733	312
Total expenses		3,640	5,189	2,312
Loss from operations		(3,632)	(5,013)	(2,300)
Equity in undistributed earnings (loss) from subsidiaries		(10,706)	(18,570)	(2,565)
Net loss		$      (14,338)	$    (23,583)	$      (4,865)

F-64

FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)

SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF CASH FLOWS

			Year Ended December 31,
			2004	2003 Restated	2002 Restated
			(In thousands)
Cash flows from operating activities:
	Net loss		$        (14,338)	$        (23,583)	$     (4,865)
	Adjustments to reconcile net loss to net cash (used in)
		provided by operating activities:
	Decrease (increase) in accounts receivables		367	(81)	(240)
	Decrease in investment in subsidiaries*		13,508	26,643	2,470
	Decrease (increase) in other assets		224	(765)	(1)
	Increase (decrease) in intercompany receivables/payables *		(515)	(21,171)	3,271
	Increase (decrease) in other liabilities		41	387	(273)
	Other		-	25	(93)
Net cash provided by (used in) operating activities			(713)	(18,545)	269
Cash flows from investing activities:
	Decrease (increase) in short-term investments		(707)	-	1,300
Net cash (used in) provided by investing activities			(707)	-	1,300
Cash flows from financing activities:
	Principal repayments on subordinated notes payable to Investors Life		(200)	(802)	(802)
	Proceeds from bank borrowings		-	15,000	-
	Cash dividend to shareholders		-	-	(2,206)
	Issuance (purchase) of treasury stock		91	2,713	(362)
	Issuance of capital stock		-	2,946	1,500
	Net cash provided by (used in) financing activities		(109)	19,857	(1,870)
	Net increase (decrease) in cash		(1,529)	1,312	(301)
	Cash and cash equivalents, beginning of year		1,696	384	685
	Cash and cash equivalents, end of year		$             167	$           1,696	$             384

* Eliminated in consolidation

F-65

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

SCHEDULE III – SUPPLEMENTARY INSURANCE INFORMATION

	Year Ended December 31, 2004, 2003, and 2002
		Future Policy
	Deferred Policy	Benefits, Losses,	Other Policy
	Acquisition	Claims and Loss	Claims and	Premium
	Costs	Expenses (1)	Benefits Payable	Revenue
	(In thousands)
2004	$       50,640	$       732,265	$       12,939	$      23,283
2003, as restated	$       54,819	$       763,125	$       13,693	$      31,057
2002, as restated	$       51,213	$       761,611	$       15,842	$      38,672
	Year Ended December 31, 2004, 2003, and 2002
		Benefits, Claims,	Amortization of
	Net	Losses, and	Deferred Policy	Other
	Investment	Settlement	Acquisition	Operating
	Income	Expenses (2)	Costs	Expenses
	(In thousands)
2004	$       30,703	$       70,666	$       10,479	$       34,176
2003, as restated	$       35,346	$       73,228	$         9,774	$       41,492
2002, as restated	$       38,168	$       83,730	$       11,013	$       34,573

(1) Includes contractholder funds

(2) Includes interest expense on contractholder funds

F-66

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

SCHEDULE IV – REINSURANCE

	Year Ended December 31, 2004, 2003, and 2002
					Percentage
		Ceded to	Assumed		of Amount
	Gross Direct	Other	from Other	Net	Assumed
	Amount	Companies	Companies	Amount	to Net
	(In thousands)
2004
Life insurance in-force	$ 9,223,922	$ 854,124	$ -	$ 8,369,798	0%
Premium:
Life insurance	$ 27,165	$ 4,080	$ -	$ 23,085	0%
Accident and health insurance	$ 281	$ 83	$ -	$ 198	0%
Total premium	$ 27,446	$ 4,163	$ -	$ 23,283	0%
2003, as restated
Life insurance in-force	$ 10,077,749	$ 1,153,916	$ -	$ 8,923,833	0%
Premium:
Life insurance	$ 34,675	$ 3,673	$ -	$ 31,002	0%
Accident and health insurance	$ 396	$ 341	$ -	$ 55	0%
Total premium	$ 35,071	$ 4,014	$ -	$ 31,057	0%
2002, as restated
Life insurance in-force	$ 10,736,157	$ 1,274,843	$ -	$ 9,461,314	0%
Premium:
Life insurance	$ 40,995	$ 2,372	$ -	$ 38,623	0%
Accident and health insurance	$ 499	$ 450	$ -	$ 49	0%
Total premium	$ 41,494	$ 2,822	$ -	$ 38,672	0%

F-67

EX-10.58

Exhibit 10.58

FAMILY LIFE CORPORATION

AMENDMENT NO. 3

TO

9% SUBORDINATED SENIOR NOTE DATED JULY 30, 1993

This Amendment No. 3 (this “Third Amendment”) dated as of March 9, 2006, is entered into by and between Family Life Corporation (the “Company”), and Investors Life Insurance Company of North America (the “Payee”). Capitalized terms used but not defined herein shall have the meaning set forth in the Subordinated Senior Note (as hereinafter defined).

RECITALS

WHEREAS, the Company and the Payee entered into that certain Subordinated Senior Note dated July 30, 1993 in the original principal amount of $30,000,000 (the “Subordinated Senior Note”);

WHEREAS, the parties amended the Subordinated Senior Note pursuant to Amendment No. 1 dated effective as of June 12, 1996;

WHEREAS, the parties amended the Subordinated Senior Note pursuant to Amendment No. 2 dated effective as of March 18, 2004;

WHEREAS, the Payee is an indirect wholly-owned subsidiary of Financial Industries Corporation (“FIC”), and the Company is a direct wholly-owned subsidiary of FIC; and

WHEREAS, the Company and the Payee desire to further amend the Subordinated Senior Note to continue the moratorium on principal payments for 12 additional months.

AGREEMENT

NOW, THEREFORE, the parties agree as follows:

A. The Subordinated Senior Note is hereby further amended as follows:

1.The Payment Schedule contained in Amendment No. 2 to the Subordinated Senior Note is hereby revised in its entirety to read as set forth on Exhibit A attached hereto.

B.Except as expressly amended by Amendment No. 1, Amendment No. 2 and this Third Amendment, the Subordinated Senior Note shall remain in full force and effect. None of the rights, interests and obligations existing and to exist under the Subordinated Senior Note are hereby released, diminished or impaired, and the parties hereby reaffirm all covenants, representations and warranties in the Subordinated Senior Note.

C.For the convenience of the parties, this Third Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

Signatures Follow on Next Page

IN WITNESS WHEREOF, the parties have executed this Third Amendment on this 9^th day of March, 2006.

COMPANY:

FAMILY LIFE CORPORATION

By:

Name:

Title:

PAYEE:

INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA

By:

Name:

Title:

Exhibit A

Revised Payment Schedule

Date of Payment	Principal Amount Paid	Unpaid Principal Balance Outstanding
6/12/1996		$30,000,000
12/12/1996	$163,540	$29,836,460
3/12/1997	$163,540	$29,672,920
6/12/1997	$163,540	$29,509,380
9/12/1997	$163,540	$29,345,840
12/12/1997	$163,540	$29,182,300
3/12/1998	$163,540	$29,018,760
6/12/1998	$163,540	$28,855,220
9/12/1998	$163,540	$28,691,680
12/12/1998	$163,540	$28,528,140
3/12/1999	$163,540	$28,364,600
6/12/1999	$163,540	$28,201,060
9/12/1999	$163,540	$28,037,520
12/12/1999	$163,540	$27,873,980
3/12/2000	$163,540	$27,710,440
6/12/2000	$163,540	$27,546,900
9/12/2000	$163,540	$27,383,360
12/12/2000	$163,540	$27,219,820
3/12/2001	$163,540	$27,056,280
6/12/2001	$163,540	$26,892,740
9/12/2001	$163,540	$26,729,200
12/12/2001	$1,336,458	$25,392,742
3/12/2002	$1,336,458	$24,056,284
6/12/2002	$1,336,458	$22,719,826
9/12/2002	$1,336,458	$21,383,368
12/12/2002	$1,336,458	$20,046,910
3/12/2003	$1,336,458	$18,710,452
6/12/2003	$1,336,458	$17,373,994
9/12/2003	$1,336,458	$16,037,536
12/12/2003	$1,336,458	$14,701,078
3/12/2004	$1,336,458	$13,364,620
6/12/2004	$0	$13,364,620
9/12/2004	$0	$13,364,620
12/12/2004	$0	$13,364,620
3/12/2005	$0	$13,364,620
6/12/2005	$0	$13,364,620
9/12/2005	$0	$13,364,620
12/12/2005	$0	$13,364,620
3/12/2006	$0	$13,364,620
6/12/2006	$0	$13,364,620

9/12/2006	$0	$13,364,620
12/12/2006	$0	$13,364,620
3/12/2007	$1,336,458	$12,028,162
6/12/2007	$1,336,458	$10,691,704
9/12/2007	$1,336,458	$9,355,246
12/12/2007	$1,336,458	$8,018,788
3/12/2008	$1,336,458	$6,682,330
6/12/2008	$1,336,458	$5,345,872
9/12/2008	$1,336,458	$4,009,414
12/12/2008	$1,336,458	$2,672,956
3/12/2009	$1,336,458	$1,336,498
6/12/2009	$1,336,498	$0

EX-10.59

Exhibit 10.59

FINANCIAL INDUSTRIES CORPORATION

AMENDMENT NO. 3

TO

9% SUBORDINATED SENIOR NOTE DATED JULY 30, 1993

This Amendment No. 3 (this “Third Amendment”) dated as of March 9, 2006, is entered into by and between Financial Industries Corporation (the “Company”), and Investors Life Insurance Company of North America (the “Payee”). Capitalized terms used but not defined herein shall have the meaning set forth in the Subordinated Senior Note (as hereinafter defined).

RECITALS

WHEREAS, Family Life Insurance Investment Company (the “Maker”) and the Payee entered into that certain Subordinated Senior Note dated July 30, 1993 in the original principal amount of $4,500,000 (the “Subordinated Senior Note”);

WHEREAS, the original parties amended the Subordinated Senior Note pursuant to Amendment No. 1 dated effective as of June 12, 1996;

WHEREAS, the Company assumed the rights and obligations of the Maker under the Subordinated Senior Note pursuant to that certain Assignment Agreement dated effective as of December 23, 1998 in accordance with Maker’s Plan of Dissolution;

WHEREAS, the Payee and Company amended the Subordinated Senior Note pursuant Amendment No. 2 dated effective as of March 18, 2004;

WHEREAS, the Payee is an indirect, wholly-owned subsidiary of the Company; and

WHEREAS, the Company and the Payee desire to further amend the Subordinated Senior Note in order to continue the moratorium on principal payments for 12 additional months.

AGREEMENT

NOW, THEREFORE, the parties agree as follows:

A. The Subordinated Senior Note is hereby further amended as follows:

1.The Payment Schedule attached to Amendment No. 2 to the Subordinated Senior Note is hereby revised in its entirety to read as set forth on Exhibit A attached hereto.

B.Except as expressly amended by Amendment No. 1, Amendment No. 2 and this Third Amendment, the Subordinated Senior Note shall remain in full force and effect. None of the rights, interests and obligations existing and to exist under the Subordinated Senior Note are hereby released, diminished or impaired, and the parties hereby reaffirm all covenants, representations and warranties in the Subordinated Senior Note.

C.For the convenience of the parties, this Third Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

Signatures Follow on Next Page

IN WITNESS WHEREOF, the parties have executed this Third Amendment on this 9^th day of March, 2006.

COMPANY:

FINANCIAL INDUSTRIES CORPORATION

By:

Name:

Title:

PAYEE:

INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA

By:

Name:

Title:

Exhibit A

Revised Payment Schedule

Date of Payment	Principal Amount Paid	Unpaid Principal Balance Outstanding
6/12/1996		$4,500,000
12/12/1996	$24,531	$4,475,469
3/12/1997	$24,531	$4,450,938
6/12/1997	$24,531	$4,426,407
9/12/1997	$24,531	$4,401,876
12/12/1997	$24,531	$4,377,345
3/12/1998	$24,531	$4,352,814
6/12/1998	$24,531	$4,328,283
9/12/1998	$24,531	$4,303,752
12/12/1998	$24,531	$4,279,221
3/12/1999	$24,531	$4,254,690
6/12/1999	$24,531	$4,230,159
9/12/1999	$24,531	$4,205,628
12/12/1999	$24,531	$4,181,097
3/12/2000	$24,531	$4,156,566
6/12/2000	$24,531	$4,132,035
9/12/2000	$24,531	$4,107,504
12/12/2000	$24,531	$4,082,973
3/12/2001	$24,531	$4,058,442
6/12/2001	$24,531	$4,033,911
9/12/2001	$24,531	$4,009,380
12/12/2001	$200,469	$3,808,911
3/12/2002	$200,469	$3,608,442
6/12/2002	$200,469	$3,407,973
9/12/2002	$200,469	$3,207,504
12/12/2002	$200,469	$3,007,035
3/12/2003	$200,469	$2,806,566
6/12/2003	$200,469	$2,606,097
9/12/2003	$200,469	$2,405,628
12/12/2003	$200,469	$2,205,159
3/12/2004	$200,469	$2,004,690
6/12/2004	$0	$2,004,690
9/12/2004	$0	$2,004,690
12/12/2004	$0	$2,004,690
3/12/2005	$0	$2,004,690
6/12/2005	$0	$2,004,690
9/12/2005	$0	$2,004,690
12/12/2005	$0	$2,004,690
3/12/2006	$0	$2,004,690
6/12/2006	$0	$2,004,690
9/12/2006	$0	$2,004,690

12/12/2006	$0	$2,004,690
3/12/2007	$200,469	$1,804,221
6/12/2007	$200,469	$1,603,752
9/12/2007	$200,469	$1,403,283
12/12/2007	$200,469	$1,202,814
3/12/2008	$200,469	$1,002,345
6/12/2008	$200,469	$801,876
9/12/2008	$200,469	$601,407
12/12/2008	$200,469	$400,938
3/12/2009	$200,469	$200,469
6/12/2009	$200,469	$0

EX-10.66

Exhibit 10.66

INTERCONTINENTAL LIFE CORPORATION

DEFINED CONTRIBUTION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Article 1

Name and Purpose

1.1Name/Effective Date. This plan, as adopted effective as of January 1, 2005 by InterContinental Life Corporation (“ILCO” or the “Company”) shall be known as the InterContinental Life Corporation Defined Contribution Supplemental Executive Retirement Plan (the “Plan”).

1.2Purpose. ILCO has established the Plan to provide designated employees with additional tax-deferred benefits in order to replace a portion of the benefits that would have accrued after December 31, 2004 under the InterContinental Life Corporation Employees Retirement Income Plan, but for the cessation of accruals effective as of December 31, 2004.

1.3Status of the Plan. It is intended that the benefits under the Plan will be tax-deferred under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”). The Plan is intended to be a plan which is unfunded and is maintained by ILCO primarily for the purpose of providing deferred compensation for a select group of highly compensated or management employees within the meaning of sections 201(2) and 301(a)(3) of the Employee Retirement Income Security Act of 1974 (“ERISA”) and shall be interpreted and administered to the extent possible in a manner consistent with that intent. The plan is further intended to conform to the requirements of IRC Section 409A as provided in the American Jobs Creation Act (2004) and regulations which may be promulgated thereunder, as necessary to defer taxation of the benefits provided hereunder until such time as benefits are paid in cash to the participants. All provisions should be interpreted in a manner consistent with the above purposes.

Article 2

Definitions

2.1Definitions. Whenever used in the Plan, the following capitalized words and phrases shall have the meaning set forth below unless the context plainly requires a different meaning.

2.1.1Change in Control. means (i) any one person, or more than one person acting as a group (as defined in the regulations relating to Section 409(A)), acquires ownership of stock of Financial Industries Corporation, the parent company of the Company (hereinafter referred to as “FIC”) that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of FIC or (ii) any one person, or more than one person acting as a group (as defined in the regulations relating to Section 409(A)), acquires (or has acquired

during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from FIC that have a total gross fair market value equal to or more than 40 percent of the total gross fair market value of all of the assets of FIC immediately prior to such acquisition or acquisitions or (iii) a majority of members of FIC’s board of directors is replaced during any six-month period by directors whose appointment or election is not endorsed by a majority of the members of FIC’s board of directors prior to the date of the appointment or election, but only to the extent these events in (i), (ii) or (iii) are deemed a change in the ownership or effective control of FIC or in the ownership of a substantial portion of the assets of FIC pursuant to Section 409(A)(a)(2)(A)(v) of the Internal Revenue Code of 1986 (“IRC” or “Code”), including any IRS or Treasury regulations, revenue rulings or notices related to such section.

2.1.2“Cause” occurs under this plan for Participants subject to an employment contract if, as and when it occurs under the terms of the Participant’s employment agreement with ILCO. For Participants not subject to the terms of an employment agreement or for those in which the employment agreement does not define cause, cause means any of the following:

(a) Participant’s conviction of, plea of guilty to, or plea of nolo contendere to a felony or misdemeanor (other than a traffic-related felony or misdemeanor) that involves fraud, dishonesty or moral turpitude,

(b) any willful action by Participant resulting in criminal, civil or internal Company conviction, sanction or judgment under Federal or State workplace harassment or discrimination laws or internal Company workplace harassment, discrimination or other workplace policy under which such action could be and could reasonably be expected to be grounds for immediate termination of a member of Senior Management (other than mere failure to meet performance goals, objectives, or measures),

(c) Participant’s habitual neglect of duties, (other than resulting from Participant’s incapacity due to physical or mental illness) which results in substantial financial detriment to the Company or any affiliate of the Company,

(d) Participant’s personally engaging in such conduct as results or is likely to result in (i) substantial damage to the reputation of the Company or any affiliate of the Company, as a respectable business, and (ii) substantial financial detriment (whether immediately or over time) to the Company or any affiliate of the Company,

(e) Participant’s intentional failure (including a failure caused by gross negligence) to cause the Company or any affiliate of the Company to comply with applicable law and regulations material to the business of the Company which results in substantial financial detriment to the Company or any affiliate of the Company, or

(f) Participant’s willful or intentional failure to comply in all material respects with a specific written direction of the Chief Executive Officer of the Company that is consistent with normal business practice and not

inconsistent with Participant’s responsibilities to the Company or any affiliate of the Company.

For purposes of clauses (c), (d), and (e) of the preceding sentence, Cause shall not mean the mere existence or occurrence of any one or more of the following, and for purposes of clause (f) of the preceding sentence, Cause shall not mean the mere existence or occurrence of item (iv) below:

(i) bad judgment,

(ii) negligence, other than Participant’s habitual neglect of duties or gross negligence;

(iii) any act or omission that Participant believed in good faith to have been in the interest of the Company (without intent of Participant to gain therefrom, directly or indirectly, a profit to which he was not legally entitled), or

(iv) failure to meet performance goals, objectives or measures;

provided, that for purposes of clauses (c), (d), (e), and (f), any act or omission that is curable shall not constitute Cause unless the Company gives Participant written notice of such act or omission that specifically refers to this Section and, within 10 days after such notice is received by Participant, Participant fails to cure such act or omission.

2.1.3“Constructive Discharge” means the participant’s voluntary Termination of Employment and a Termination Date occurring within six months after either a material change in the Participant’s responsibilities or a reduction of more than 10% in his base salary. A Constructive Discharge shall not occur if the Participant agrees in advance, in writing, to the circumstances that otherwise would constitute a material change in responsibilities or reduction of more than 10% in base salary.

2.1.4“Disability” means disability within the meaning of IRC Section 409A(a)(2)(c).

2.1.5“Income and Benefit Limitations” mean the amount listed in sections 401(a)(17)(A) and 404(l) of the Code, including succeeding sections, as adjusted for increases in the cost of living (“COLA”) under section 401(a)(17)(B) of the Code, as the maximum annual compensation taken into account under the Qualified Plan, and the limitations set forth in section 415(c) of the Code, including succeeding sections, as adjusted for COLA, regarding maximum annual benefits payable under the Qualified Plan.

2.1.6“Normal Retirement Date” has the same meaning as set forth in the Qualified Plan.

2.1.7“Participant” means an employee who is eligible to participate in the Plan under Article 3.

2.1.8 “Participating Employer” has the same meaning as set forth in the 401K Plan.

2.1.9“Participation Date” means the date on which an employee becomes a Participant in the Plan under Article 3.

2.1.10“Plan Administrator” means the person or entity designated by ILCO to administer the Plan. The initial Plan Administrator is the Administration Committee comprised of J. Bruce Boisture, Theodore A. Fleron and Vincent L. Kasch.

2.1.11 “Plan Year” means each calendar year.

2.1.12“Qualified Plan” means the InterContinental Life Corporation Employees Savings Investment Plan and Trust, as amended from time to time.

2.1.13 “Rabbi Trust” means the trust established by ILCO for the purpose of holding the assets of this Plan.

2.1.14“SERP Benefit” means the benefit payable to each Participant under the terms of the Plan as set forth in Article 4.

2.1.15“Specified Employee” means a Key Employee (as defined in IRC Section 416(i) without regard to paragraph (5) thereof) of a corporation, any stock in which is publicly traded on an established securities market or otherwise.

2.1.16“Termination Date” means the date that a Participant incurs a Separation from Service within the meaning of IRC Section 409A(a)(2)(A)(i) and regulations thereunder.

2.1.17“Vested SERP Percentage” means the applicable percentage from the following table based on the Participant’s service at the time of Termination of Employment, where service is measured in completed days of employment and 365 days of employment is equal to one year of service:

Years of Service at Termination of Employment	Vested SERP Percentage
Less than 5	0%
5 or more	100%

2.1.18“Termination of Employment” means the Participant’s ceasing to be employed by the Employer for any reason whatsoever, voluntary or involuntary, including by reason of death or Disability.

2.2Gender and Number. Except as otherwise indicated by context, masculine terminology used herein also includes the feminine and neuter, and terms used in the singular or plural may also include the other number.

Article 3

Participation

3.1 Eligibility and Participation

3.1.1Participants as of January 1, 2005. Effective January 1, 2005, the following employees shall be participants in the Plan:

Davis, Cynthia Hall

Kasch, Vincent L.

Rhodes, Lloyd F.

Schneider, Kenneth Lee

Tritz, Peter A.

Walker, Nigel

Whitmire, Wayne P.

3.1.2 Employees who may become Participants after January 1, 2005. In the event any of the following employees become a Highly Compensated Employee (HCE) as defined under Internal Revenue Code Section 414(q), then such employee shall become a Participant in the Plan on the January 1^st following the year in which his compensation exceeds the 414(q) HCE compensation threshold. The employees subject to this provision are:

Bierman, Connie S.

Brinson, Karen

Humphrey, Cecil

Richesin, Marjorie C.

Rohlack, Ruth Ann

3.1.3Other Participation Conditions. To participate in and receive benefits under the Plan, each Participant agrees to observe all rules and regulations established by ILCO for administering the Plan and shall abide by all decisions of ILCO in the construction and administration of the Plan. Any action with respect to the Plan taken by the Plan Administrator or ILCO, or any action authorized by or taken at the direction of

the Plan Administrator or ILCO shall be conclusive upon all Participants and beneficiaries entitled to benefits under the Plan.

3.2Eligible Benefits. Subject to other requirements set forth herein, each Participant in the Plan shall be eligible to receive benefits in an amount described in Article 4.

3.3Continued Participation. A Participant in the Plan shall continue to be a Participant so long as amounts are payable to him under the Plan. On and after a Participant’s Termination Date with ILCO, no additional benefits or contributions accrue to a Participant.

Article 4

SERP Benefit

4.1SERP Account. A SERP account shall be maintained for each Participant. The account shall have an initial value of zero and shall be increased by Contribution Credits in accordance with Section 4.2 and increased (or decreased) by Income Credits in accordance with Sections 4.3 and 4.4. The SERP account shall be decreased by any distributions paid.

4.2Contribution Credits. On the last day of each calendar year the Participant remains employed by the Employer, beginning with the 2005 calendar year and ending with the year in which the Participant’s employment is terminated, a Contribution Credit shall be made in the SERP account. For 2005, the Contribution Credit shall be an amount equal to the applicable contribution rate as set forth in the table below applied to compensation earned in 2005. For each year after 2005, the rates in the table below shall be increased by 0.25% over the rate in effect for the immediately preceding year, with such resulting rate being applied to compensation for such year. In addition, in the year of termination of employment a contribution credit shall be made to the SERP account based upon the contribution rate in effect at that time and compensation for the year earned through the Termination Date.

Name	2005 Contribution Rate (Percentage of 2005 Compensation)
Bierman, Connie S.	1.25%
Brinson, Karen	1.75%
Davis, Cynthia Hall	0.00%
Humphrey, Cecil	0.25%
Kasch, Vincent Lee	0.25%
Rhodes, Lloyd F.	4.25%
Richesin, Marjorie C.	0.00%
Rohlack, Ruth Ann	0.25%
Schneider, Kenneth Lee	0.00%
Tritz, Peter A.	5.75%
Walker, Nigel	4.50%
Whitmire, Wayne P.	0.00%

Contribution Rates for employees who become participants after January 1, 2005 shall be determined for a given year from the above table as though they had been a Participant since January 1, 2005, but no contribution credits shall be made for years prior to becoming a Participant.

4.3Income Credits. At any point in time after the initial credits are made in Section 4.2, the SERP account shall be credited (or debited) with increases (or decreases) determined in accordance with the Income Method Election made in Section 4.4.

4.4 Income Method Election. At the inception of a Participant’s participation in the Plan, such Participant shall designate the investment fund(s) to be used for the investment of Contribution Credits made with respect to such Participant. Such designation shall be made for the investment options available under the 401K Plan, except for common stock of Financial Industries Corporation. A Participant may modify a prior election as of the first day of each calendar quarter by filing written notice with the Plan Administrator at least 10 days prior to the date on which such change is to be effective.

4.5Investment Direction. The Plan Administrator is not under any duty to question any investment direction of a Participant or Beneficiary, or to make any investment recommendations, or to provide to any person any investment advice, or to provide any investment information. Neither the Company, the Participating Employers, nor the Plan Administrator are responsible for or liable for any damage or loss or expense or other claim which may arise from that Participant's or Beneficiary's investment direction of his, or her Account or from any failure on the part of the Participant or Beneficiary to exercise his right to

direct the investment of the account. The Company’s obligation to pay a SERP Benefit under the Plan shall not exceed the actual amount or value of the Participant's Account, regardless of whether the investments credited to the Account followed any investment designation of the Participant or Beneficiary. The Company is not liable for losses or damages arising out of: any action in approving or purchasing any investments, the performance of any investments held under the Plan, any mistakes or errors in the execution of any investment directions or instructions, investing or failing to invest any amounts set aside to provide for the benefits provided under this Plan.

4.6Ownership of Plan Assets. The Company shall own and maintain the amounts deferred under this Plan. The Company shall at all times be the legal and beneficial owner of all such deferred amounts, including the income thereof and any increments thereon, and the existence of neither the Plan nor any investment fund attributable to amounts deferred under the Plan. Assets of the Plan will be subject to the creditors of the Employer.

4.7Disability Benefits. If the Participant’s Termination of Employment occurs prior to the Normal Retirement Age for Disability, the Employer shall pay to the Participant a benefit equal to the amount determined under Section 4.8.

4.8Termination Benefits - Without Cause/Constructive Discharge. If, prior to the Normal Retirement Age, the Employer terminates the Participant’s employment without Cause or a Constructive Discharge occurs, the Employer shall pay to the Participant in the Form of Benefit provided in Section 4.14 commencing on the 1^st day of the month following the Participant’s Termination Date, the SERP Benefit which is equal to the Vested SERP Benefit Percentage times the SERP Account Value as of the date of distribution. Notwithstanding the preceding, in the case of any Specified Employee, the commencement date shall be the 1^st of the month following the six month anniversary of the Participant’s Termination Date or, if earlier, the Participant’s date of death.

4.9Termination Benefits - Voluntary. If, prior to the Normal Retirement Age, the Participant voluntarily terminates employment, the Employer shall pay to the Participant a SERP Benefit at the time and in the amount described in Section 4.8.

4.10 Death Benefit

4.10.1Death While Employed. If the Participant dies prior to Termination of Employment, the Employer shall pay a SERP Benefit to the Participant’s beneficiary, within 90 days after the Participant’s death, equal to the amount determined under Section 4.8, except that the Vested SERP Benefit Percentage shall be deemed to be 100%.

4.10.2Death Following Disability, Termination Without Cause or Constructive Discharge. If the Participant dies after Termination of Employment for Disability, after the Employer terminates the Participant’s employment without Cause, or after a Constructive Discharge, and before the Employer commences payment of the SERP Benefit to the Participant, the Employer shall pay to the Participant’s beneficiary, within 90 days after the Participant’s death, the amount determined in Section 4.8 as of the date of payment.

4.11Termination Benefit - With Cause. If the Employer terminates the Participant’s employment with Cause, the Participant shall be entitled to no benefit under this Plan. The Participant shall forfeit the entire SERP Benefit.

4.12Change in Control. Upon a Change in Control that satisfies the payment and permitted acceleration of benefit criteria under IRC Section 409A(a)(2)(A)(v) and Section 409A(a)(3), each Participant whose benefits under the Plan have not commenced as of the date of the Change in Control shall be entitled to a fully vested and nonforfeitable SERP Benefit as provided in Section 4.1, increased by a change in control Contribution Credit equal to: the contribution rate in effect at the time of Change in Control multiplied by two (2), where such contribution rate is then applied to the last complete calendar year of compensation preceding the Change in Control. The payment of such benefit shall commence within 30 days of the date of the Change in Control.

4.13Informal Funding. The Employer in its discretion may procure such assets as the Employer may choose to informally fund the benefit under this Plan, including the use of a so-called “Rabbi” Trust. The Participant shall have no interest whatsoever in any such assets. The rights of the Participant, or of his beneficiaries or estate, to benefits under the Plan shall be solely those of unsecured creditors of the Employer. Any asset acquired by or held by the Employer shall not be deemed to be held as security for the performance of the obligations of the Employer but shall be, and remain, a general, unpledged, unsecured and unrestricted asset of the Employer.

4.13.1In General. Any obligation of the Employer to pay benefits hereunder shall be an unsecured promise, and any right to enforce such obligation shall be solely as a general creditor of the Employer. For the convenience and benefit of the Employer and to the extent not inconsistent with the foregoing sentence, the Employer intends to establish one or more irrevocable trusts to hold assets to meet its obligations under the Plan to Participant or his Beneficiaries.

4.13.2Trust Assets. The property comprising the assets of a Trust established under paragraph 4.13.1 shall, at all times, remain the property of the Trust. The Trustee shall

distribute the assets comprising the Trust in accordance with the provisions of the Plan and Trust as instructed by the Employer, but in no event shall the Trustee distribute the assets of the Trust to or for the benefit of the Employer, except as provided in the Trust in the case of insolvency or bankruptcy of the Employer or after satisfaction of all the Employer obligations under the Plan to the Participants.

4.14Optional Forms of Payment. A Participant may elect in writing on or prior to the date this Plan document is signed to receive an optional form of payment.

If no such election is made in writing on or prior to the date this Plan document is signed, the SERP Benefit, if any is payable, shall be paid under Option 1 in 5 equal annual installments.

4.14.1Option 1 – Annual installments payable for a specified guaranteed number of years, with such specified guaranteed number of years equal to 3, 5, 7 or 10 years.

4.14.2 Option 2 - A single, lump sum payment.

Article 5

Beneficiary Provisions

5.1Beneficiary Designations. The Participant shall designate one or more primary and secondary beneficiaries by filing a written notice of such designation with the Employer. The Participant may revoke or modify the designation at any time by a further written designation. However, no such designation, revocation or modification shall be effective unless signed by the Participant and accepted by the Employer during the Participant’s lifetime. The Participant’s beneficiary designation shall be deemed automatically revoked (i) in the event of the death of the beneficiary prior to the Participant’s death, or (ii) if the beneficiary is the Participant’s spouse, in the event of dissolution of marriage. If the Participant dies without a valid beneficiary designation, the Employer shall pay the SERP Benefit to the Participant’s surviving spouse, if any, and if none, to the Participant’s estate.

5.2Death of Beneficiary. If a beneficiary dies before receiving the SERP Benefit due to such beneficiary pursuant to this Plan, the Employer shall pay the SERP Benefit to remaining primary beneficiaries and if none are surviving, to the secondary beneficiaries and if none are surviving to the legal representatives of the beneficiary’s estate.

5.3Facility of Payment. If a benefit is payable to a minor or person declared incompetent or to a person incapable of handling the disposition of his or her property, the Employer may pay

such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Employer may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Employer from all liability with respect to such benefit.

Article 6

Trust

The Company has established a Rabbi Trust into which Participating Employers shall contribute assets  which  shall  be held  therein,  subject  to the  claims  of the  general creditors of the Company  until the  contributed  assets are paid to Participants and their beneficiaries in such manner and at such times as specified in this Plan. The Company and each Participating Employer shall make contributions to the Rabbi Trust to provide for the funding of the liabilities of this Plan. Each of the Participating Employers shall be considered a grantor as to its respective portion of the Trust. To the extent the language in this Plan is modified by the language in the Rabbi Trust agreement, the provisions of the Rabbi Trust agreement shall supersede this Plan.

Article 7

Administration, Powers and Finances

7.1Administration. Unless otherwise determined by the Board of Directors of the Company (“Board”), the Administration Committee shall be the named Plan Administrator and shall act as fiduciary under the Plan.

7.2Powers of the Company. The Company shall have all powers necessary to administer the Plan, including, without limitation, the following powers:

7.2.1to determine the rights and benefits and all claims, demands and actions arising out of the provisions of the Plan of any Participant, Beneficiary, deceased Participant, or other person having or claiming to have any interest under the Plan;

7.2.2to interpret the provisions of the Plan and to decide all matters under the Plan; and

7.2.3to establish rules for the administration of the Plan and to prescribe any forms required to administer the Plan.

7.3Actions of the Company. All determinations, interpretations, rules, and decisions of ILCO shall be final, conclusive and binding upon all person having or claiming to have any interest or right under the Plan, in the absence of clear and convincing evidence that the Plan Administrator acted arbitrarily and capriciously.

7.4Delegation. The Company shall have the power to delegate specific duties and responsibilities to the Plan Administrator, other officers or employees of the Company or other individuals or entities. Any delegation by the Company may allow further delegations by the individual or entity to whom the delegation is made. Any delegation may be rescinded by the Company at any time. Each person or entity to whom a duty or responsibility has been delegated shall be responsible for the exercise of such duty or responsibility and shall not be responsible for any act or failure to act of any other person or entity. Any individual(s) serving as Plan Administrator who is a Participant will not vote or act on any matter relating solely to himself.

7.5Indemnification of Plan Administrator. The Company agrees to indemnify and to defend to the fullest extent permitted by law any persons who are on the committee which serves as Plan Administrator, including any delegates thereof, against all liabilities, damages, cost and expenses (including attorneys’ fees and amounts paid in settlement of any claims approved by ILCO) occasioned by any act or omission to act in connection with the Plan, if such act or omission is in good faith.

7.6Reports and Records. The Company and those to whom the Company has delegated duties under the Plan shall keep records of all their proceedings and actions and shall maintain books of account, records, and other data as shall be necessary for the proper administration of the Plan and for compliance with applicable law. To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to compensation of Participants, their employment, retirement, death, termination of employment, and such other pertinent facts as the Plan Administrator may require.

7.7Finances. The cost of the Plan shall be borne by the Company and the Participating Employers, except as otherwise provided herein.

Article 8

Claims Procedure

8.1Claims. A Participant, any Beneficiary of a deceased Participant, or an authorized representative of the Participant or Beneficiary may make a claim for benefits by filing a written claim for such benefits with the Administration Committee, in a form that may be prescribed by the Administration Committee, which shall set forth (a) the name, address and Social Security number of the Participant, (b) the period of time the Participant was employed with ILCO, and (c) such other information as the Administration Committee may require.

8.2Notice of Decision. If a claim is wholly or partially denied, notice of the decision, in accordance with Section 8.3, shall be furnished to the claimant within a reasonable period of time, not to exceed 90 days after the Administration Committee’s receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of such initial period. The extension notice shall indicate the special circumstance requiring an extension of time and the date on which the Administration Committee expects to render a decision.

8.3Content of Notice. The Administration Committee shall provide every claimant who is denied a claim for benefits written notice setting forth, in a manner calculated to be understood by the claimant, the following: (a) the specific reason or reasons for the denial, (b) specific reference to pertinent Plan provisions upon which the denial is based, (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary, and (d) an explanation of the Plan’s claims review procedure and time limits applicable to such procedure, as set forth in Sections 8.4 and 8.5, including a statement of the claimant’s right to bring a civil action under Sections 502(a) of ERISA following a denial on review.

8.4Appeal Procedure. The purpose of the review procedure set forth in this Section 8.4 and in Section 8.5 is to provide a procedure by which a claimant, under the Plan, may have a reasonable opportunity to appeal denial of a claim to the Appeals Committee for a full and fair review. To accomplish that purpose, the claimant (or his duly authorized representative) (a) must request review upon written application to the Appeals Committee within 60 days after he receives written notice of the denial of his claim, (b) may submit written comments, documents, records and other information relating to his claim, (c) may, upon request and free of charge, have reasonable access to, and copies of, all documents, records and other information relevant to his claim, and (d) must be given a review that takes into account all comments, documents,

records and other information submitted by the claimant relating to his claim, without regard to whether such information was submitted or considered in the initial benefit determination.

8.5Review Procedure. Decision on review of a denied claim shall be made in the following manner: (a) the decision on review shall be made by the Appeals Committee, which may, in its discretion, hold a hearing on the denied claim; (b) the Appeals Committee shall make its decision within a reasonable period of time, but not later than 60 days after the Appeals Committee receives the request for review, unless special circumstances require extension of time, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review; (c) if such an extension of time for review is required, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension and shall indicate the special circumstances requiring an extension and the date by which the Appeals Committee expects to render its decision; (d) the decision on review shall be in writing, and, in the case of a benefit denial, shall set forth, in a manner calculated to be understood by the claimant: (1) the specific reason or reasons for the denial, (2) reference to the specific Plan provisions on which the denial is based, and (3) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of all documents, records and other information relevant to the claimant’s claim for benefits.

8.6Appeals Committee. For purposes of this Article 8, the Appeals Committee shall consist of a committee of at least three but not more than five individuals appointed by the Board of Directors of ILCO.

Article 9

Amendments and Termination

9.1Amendments. The Company may amend the Plan, in full or in part, at any time and from time to time, provided that any such amendment shall not affect the SERP Benefit that has accrued to the Participants (based on the Plan provisions and Income and Benefit Limitations then in effect) prior to the effective date of such amendment, unless the affected Participants consent in writing to such amendment. Any amendment shall be filed with the Plan documents maintained by the Company.

9.2Termination. The Company expects the Plan to be permanent, but necessarily must, and hereby does, reserve the right to terminate the Plan at any time. In the event of the termination of the Plan, the SERP Benefit that has accrued to the Participants (based on the Plan provisions and Income and Benefit Limitations then in effect) prior to the effective date of the termination shall not be adversely affected unless the affected Participants consent in writing, but a Participant shall not be entitled to any further or future benefit accruals as contribution credits

after the termination of the Plan. If the 401K Plan is terminated for any reason, this Plan is automatically terminated on the effective date of the termination of the 401K Plan. Except as expressly provided in this Plan, neither the Company, the Participating Employers, nor any of the employees of the Company or the Participating Employers shall have any further financial obligations hereunder after the termination of this Plan. The SERP Benefit, to the extent accrued upon termination of the Plan, shall vest immediately and be paid as soon as administratively feasible.

Article 10

Miscellaneous

10.1No Guarantee of Employment. The adoption and maintenance of the Plan shall not be deemed to be a policy of employment between the Company , any Participating Employer and any Participant. Nothing contained herein shall give any Participant the right to be retained in the employ of the Company or any Participating Employer or to interfere with the right of the Company or a Participating Employer to discharge any Participant at any time, nor shall it give the Company or a Participating Employer the right to require any Participant to remain in its employ or to interfere with the Participant’s right to terminate employment at any time.

10.2Non-Alienation. No benefit payable at any time under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, or encumbrance of any kind.

10.3 Funding. The Plan, notwithstanding the creation of the Rabbi Trust, is intended

to be unfunded for purposes of Title I of ERISA. The Company and the Participating Employers shall make contributions to the Rabbi Trust in accordance with the terms of the Rabbi Trust. Any funds which may be invested and any assets which may be held to provide benefits under this Plan shall continue for all purposes to be a part of the general funds and assets of the Company and no person other than the Company shall by virtue of the provisions of this Plan have any interest in such funds and assets. To the extent that any person acquires a right to receive payments from the Company or the Participating Employers under this Plan, such rights shall be no greater than the right of any unsecured general creditor.

10.4Applicable Law. The Plan and all rights hereunder shall be governed by and construed according to the laws of the State of Texas, except to the extent such laws are preempted by the laws of the United States of America.

IN WITNESS WHEREOF, effective as of January 1, 2005, the Company has adopted this Plan on the 27th day of October 2005.

INTERCONTINENTAL LIFE CORPORATION

By:

Name:

Title:

Date:

ATTEST:

By:

Name:

Date:

EX-10.67

Exhibit 10.67

INTERCONTINENTAL LIFE CORPORATION

PENSION RESTORATION PLAN

FOR RULE OF 68 HCE’S

Article 1

Name and Purpose

1.1Name/Effective Date. This plan, as adopted effective January 1, 2005 by InterContinental Life Corporation (“ILCO” or the “Company”) shall be known as the InterContinental Life Corporation Pension Restoration Plan for Rule of 68 HCE’s (the “Plan”).

1.2Purpose. ILCO has established the Plan to provide designated employees with additional tax-deferred benefits so as to bring their total benefits to the level that would have been attained if accruals under the InterContinental Life Corporation Employees Retirement Income Plan (“the Qualified Plan”) were not frozen with respect to such employees under the Qualified Plan Amendment No. 3 adopted effective December 31, 2004.

1.3Status of the Plan. It is intended that the benefits under the Plan will be tax-deferred under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”). The Plan is intended to be a plan which is unfunded and is maintained by ILCO primarily for the purpose of providing deferred compensation for a select group of highly compensated or management employees within the meaning of sections 201(2) and 301(a)(3) of the Employee Retirement Income Security Act of 1974 (“ERISA”) and shall be interpreted and administered to the extent possible in a manner consistent with that intent.

Article 2

Definitions

2.1Definitions. Whenever used in the Plan, the following capitalized words and phrases shall have the meaning set forth below unless the context plainly requires a different meaning.

2.1.1“Actuarial Equivalency” has the same meaning and is computed in the same manner as set forth in the Qualified Plan. If, at the time a computation of Actuarial Equivalency needs to be made with respect to a Participant, there is no methodology set forth in the Qualified Plan, Actuarial Equivalency shall be computed using the same methodology as set forth in the most recent Qualified Plan that contained methodology for computing Actuarial Equivalency.

2.1.2 “Change in Control” means (i) any one person, or more than one person acting as a group (as defined in the regulations relating to Section 409(A)), acquires ownership of stock of Financial Industries Corporation, the parent company of the Company (hereinafter referred to as “FIC”) that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of FIC or (ii) any one person, or more than one person acting as a group (as defined in the regulations relating to Section 409(A)), acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from FIC that have a total gross fair market value equal to or

more than 40 percent of the total gross fair market value of all of the assets of FIC immediately prior to such acquisition or acquisitions or (iii) a majority of members of FIC’s board of directors is replaced during any six-month period by directors whose appointment or election is not endorsed by a majority of the members of FIC’s board of directors prior to the date of the appointment or election, but only to the extent these events in (i), (ii) or (iii) are deemed a change in the ownership or effective control of FIC or in the ownership of a substantial portion of the assets of FIC pursuant to Section 409(A)(a)(2)(A)(v) of the Internal Revenue Code of 1986, including any IRS or Treasury regulations, revenue rulings or notices related to such section.

2.1.3 “Income and Benefit Limitations” mean the amount listed in sections 401(a)(17)(A) and 404(l) of the Code, including succeeding sections, as adjusted for increases in the cost of living (“COLA”) under section 401(a)(17)(B) of the Code, as the maximum annual compensation taken into account under the Qualified Plan, and the limitations set forth in section 415(b) of the Code, including succeeding sections, as adjusted for COLA, regarding maximum annual benefits payable under the Qualified Plan.

2.1.4“Normal Retirement Date” has the same meaning as set forth in the Qualified Plan.

2.1.5“Participant” means a Rule of 68 HCE who is eligible to participate in the Plan under Article 3.

2.1.6“Participating Employer” has the same meaning as set forth in the Qualified Plan.

2.1.7“Participation Date” means the date on which a Rule of 68 HCE first becomes a Participant in the Plan under Article 3.

2.1.8“Plan Administrator” means the person or entity designated by ILCO to administer the Plan. The initial Plan Administrator is the Administration Committee comprised of J. Bruce Boisture, Theodore A. Fleron and Vincent L. Kasch.

2.1.9 “Plan Year” means each calendar year.

2.1.10“Qualified Plan” means the InterContinental Life Corporation Employees Retirement Income Plan, as amended from time to time.

2.1.11 “Rabbi Trust” means the trust established by ILCO for the purpose of holding the assets of this Plan.

2.1.12“Restoration Benefit” means the benefit payable to each Participant under the terms of the Plan as set forth in Section 4.2.

2.1.13“Rule of 68 HCE” has the same meaning as set forth in the Amendment to the Qualified Plan, adopted effective December 31, 2004.

2.1.14“Rule of 68 NHCE” has the same meaning as set forth in the Amendment to the Qualified Plan, adopted effective December 31, 2004.

2.1.15 “Termination Date” means the date that a Participant is no longer an employee of a Participating Employer.

2.2Gender and Number. Except as otherwise indicated by context, masculine terminology used herein also includes the feminine and neuter, and terms used in the singular or plural may also include the other number.

Article 3

Participation

3.1Eligibility and Participation. A Rule of 68 HCE shall be eligible to participate in the Plan upon the date of his selection as a Participant by the ILCO Board of Directors. This selection shall be evidenced in writing and signed by an officer of ILCO. To participate in and receive benefits under the Plan, each Participant agrees to observe all rules and regulations established by ILCO for administering the Plan and shall abide by all decisions of ILCO in the construction and administration of the Plan. Any action with respect to the Plan taken by the Plan Administrator, or ILCO, or any action authorized by or taken at the direction of the Plan Administrator, or ILCO, shall be conclusive upon all Participants and beneficiaries entitled to benefits under the Plan.

3.2Eligible Benefits. Subject to other requirements set forth herein, each Participant in the Plan shall be eligible to receive benefits in an amount equal to the Restoration Benefit as described in Article 4.

3.3Continued Participation. A Participant in the Plan shall continue to be a Participant so long as amounts are payable to him under the Plan. On and after a Participant’s Termination Date with ILCO, no additional Restoration Benefit accrues to a Participant.

Article 4

Restoration Benefit

4.1In General. Benefits under the Plan shall be calculated using the same methodology and formulas as set forth in the Qualified Plan, unless otherwise indicated herein.

4.2Restoration Benefit. The amount of a Participant’s Restoration Benefit under the Plan shall be calculated as follows:

4.2.1. First, the following amount shall be computed as of the Termination Date:

4.2.1.1The amount that would have been payable to the Participant under the Qualified Plan at his Normal Retirement Date in its normal form (the “Retirement Benefits”) solely if the Rule of 68 HCE had been a Rule of 68 NHCE on December 31, 2004, but the amount determined under this section 4.2.1.1 shall be calculated as if the QNEC Offset Amount component of the qualified plan benefit formula is determined using zero QNEC Contributions for years in which the participant had been both a Rule of 68 HCE and a Highly Compensated Employee, minus

4.2.1.2the actual amount payable at the Normal Retirement Date to a Participant as his Retirement Benefits in its normal form under the Qualified Plan.

4.2.2Second, the amount calculated under Section 4.2.1 shall be converted to an optional form of payment amount computed as of the Termination Date using the Actuarial Equivalency methodology described in Section 2.1.1 of the Plan.

4.2.3For purposes of the calculation under Section 4.2, “in its normal form” has the same meaning as set forth in the Qualified Plan. For purposes of the calculation under Section 4.2, the Income and Benefit Limitations shall apply to each step of the calculation, including specifically the determination of the amount described in Section 4.2.1.1.

4.3 Payment of Benefits

4.3.1Payment to Participant. ILCO shall pay to a Participant who has vested in his benefits under Article 4 hereof, his Restoration Benefit in the same manner, at the same time and in the same optional form of benefit as the Participant’s benefits under the Qualified Plan are paid.

4.3.2.Survivorship Benefits. If payment of a Participant’s Restoration Benefit has not previously commenced under Section 4.3.1, upon the death of a Participant, ILCO shall pay a Participant’s Restoration Benefit if any, in accordance with this Section. The payment under this Section 4.3.2 is in lieu of, but not in addition to, the payment under Section 4.3.1.

4.3.2.1Death Prior to Commencement of Payment. If the Participant dies before his Restoration Benefit commences under 4.3.1, ILCO shall pay a Participant’s Restoration Benefit, valued as of the date of the Participant’s death, to the Participant’s beneficiary in the same manner, at the same time and in the same optional form of benefit as the Participant’s benefits under the Qualified Plan are paid.

4.3.2.2Beneficiary Designations. The Beneficiary(ies) under this Plan shall be the same as under the Qualified Plan.

4.3.2.3Facility of Payment. If a benefit is payable to a minor or person declared incompetent or to a person incapable of handling the disposition of this property, ILCO may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person following the guidelines and procedures set forth in the Qualified Plan. Such distribution shall completely discharge ILCO from all liability with respect to such benefit.

4.4 Lump Sum Payments. Notwithstanding the provisions of Sections 4.3.1 and 4.3.2, if on a Participant's Termination Date, his or her accrued vested benefit under this Plan is less than $10,000 in present value (calculated in accordance with present value

determinations under the Qualified Plan), such benefit shall be distributed in a lump sum on the date that benefit payment commence under the Qualified Plan.

Article 5

Trust

The Company has established a Rabbi Trust into which Participating Employers shall contribute assets  which  shall  be held  therein,  subject  to the  claims  of the  general creditors of the Company  until the  contributed  assets are paid to Participants and their beneficiaries in such manner and at such times as specified in this Plan. The Company and each Participating Employer shall make contributions to the Rabbi Trust to provide for the funding of the liabilities of this Plan. Each of the Participating Employers shall be considered a grantor as to its respective portion of the Trust. To the extent the language in this Plan is modified by the language in the Rabbi Trust agreement, the provisions of the Rabbi Trust agreement shall supersede this Plan.

Article 6

Funding

6.1 From time to time, the Participating Employers shall make contributions to the Rabbi Trust in such amounts as the Participating Employers determine are necessary and desirable in order to maintain the Plan on a sound actuarial basis. For this purpose, the contributions shall be in an amount at least equal to that which would be required under the IRS rules and regulations pertaining to the minimum funding requirements of Section 412 of the Internal Revenue Code. In determining the amount and incidence of such contributions, the Participating Employers will take into account such actuarial recommendations as may be provided by the enrolled actuary (as that term is defined in ERISA, which enrolled actuary may, but is not required to be, the same person appointed as the enrolled actuary for the Qualified Plan,

Article 7

Vesting

7.1In General. Except as otherwise provided in this Article 7, a Participant shall be vested in and shall have a nonforfeitable right to his Restoration Benefit on the date and to the extent he becomes vested in his benefits under the Qualified Plan.

7.2 Early Vesting

7.2.1Change of Control. A Participant shall become fully vested in his Restoration Benefit immediately prior to a Change of Control.

7.2.2Death or Disability. A Participant shall become fully vested in his Restoration Benefit immediately prior to termination of the Participant’s employment by reason of the Participant’s death or total and permanent disability. Whether a Participant’s termination of employment is by reason of the Participant’s total and permanent disability shall be determined by the Plan Administrator in its sole discretion.

7.2.3Bankruptcy Filing. A Participant shall become fully vested in his Restoration Benefit immediately prior to a bankruptcy filing by ILCO, in which case the Participant will have the same rights as those of a general creditor of ILCO with respect

to his Restoration Benefit, and payment of the Restoration Benefit shall be made in accordance with applicable bankruptcy law.

7.2.4Termination of Qualified Plan. A Participant shall become fully vested in his Restoration Benefit immediately prior to termination of the Qualified Plan.

Article 8

Administration, Powers and Finances

8.1Administration. Unless otherwise determined by Board of Directors of the Company (“Board”), the Administration Committee shall be the named Plan Administrator and shall act as fiduciary for ILCO under the Plan.

8.2Powers of Company. The Company shall have all powers necessary to administer the Plan, including, without limitation, the following powers:

8.2.1to determine the rights and benefits and all claims, demands and actions arising out of the provisions of the Plan of any Participant, beneficiary, deceased Participant, or other person having or claiming to have any interest under the Plan;

8.2.2to interpret the provisions of the Plan and to decide all matters under the Plan; and

8.2.3to establish rules for the administration of the Plan and to prescribe any forms required to administer the Plan.

8.3Actions of the Company. All determinations, interpretations, rules, and decisions of ILCO shall be final, conclusive and binding upon all persons having or claiming to have any interest or right under the Plan, in the absence of clear and convincing evidence that the Plan Administrator acted arbitrarily and capriciously.

8.4Delegation. The Company shall have the power to delegate specific duties and responsibilities to the Plan Administrator, other officers or employees of the Company or other individuals or entities. Any delegation by the Company may allow further delegations by the individual or entity to whom the delegation is made. Any delegation may be rescinded by the Company at any time. Each person or entity to whom a duty or responsibility has been delegated shall be responsible for the exercise of such duty or responsibility and shall not be responsible for any act or failure to act of any other person or entity. Any individual(s) serving as Plan Administrator who is a Participant will not vote or act on any matter relating solely to himself.

8.5Indemnification of Plan Administrator. The Company agrees to indemnify and to defend to the fullest extent permitted by law any persons who are on the committee which serves as Plan Administrator, including any delegates thereof, against all liabilities, damages, cost and expenses (including attorneys’ fees and amounts paid in settlement of any claims approved by ILCO) occasioned by any act or omission to act in connection with the Plan, if such act or omission is in good faith.

8.6Reports and Records. The Company and those to whom the Company has delegated duties under the Plan shall keep records of all their proceedings and actions and shall

maintain books of account, records, and other data as shall be necessary for the proper administration of the Plan and for compliance with applicable law. To enable the Plan Administrator to perform its functions, The Company shall supply full and timely information to the Plan Administrator on all matters relating to compensation of Participants, their employment, retirement, death, termination of employment, and such other pertinent facts as the Plan Administrator may require.

8.7Finances. The cost of the Plan shall be borne by the Company and the Participating Employers, except as otherwise provided herein.

Article 9

Claims Procedure

9.1Claims. A Participant, any Beneficiary of a deceased Participant, or an authorized representative of the Participant or Beneficiary may make a claim for benefits by filing a written claim for such benefits with the Administration Committee, in a form that may be prescribed by the Administration Committee, which shall set forth (a) the name, address and Social Security number of the Participant, (b) the period of time the Participant was employed with ILCO, and (c) such other information as the Administration Committee may require.

9.2Notice of Decision. If a claim is wholly or partially denied, notice of the decision, in accordance with Section 8.3, shall be furnished to the claimant within a reasonable period of time, not to exceed 90 days after the Administration Committee’s receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of such initial period. The extension notice shall indicate the special circumstance requiring an extension of time and the date on which the Administration Committee expects to render a decision.

9.3Content of Notice. The Administration Committee shall provide every claimant who is denied a claim for benefits written notice setting forth, in a manner calculated to be understood by the claimant, the following: (a) the specific reason or reasons for the denial, (b) specific reference to pertinent Plan provisions upon which the denial is based, (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary, and (d) an explanation of the Plan’s claims review procedure and time limits applicable to such procedure, as set forth in Sections 8.4 and 8.5, including a statement of the claimant’s right to bring a civil action under Sections 502(a) of ERISA following a denial on review.

9.4Appeal Procedure. The purpose of the review procedure set forth in this Section 9.4 and in Section 9.5 is to provide a procedure by which a claimant, under the Plan, may have a reasonable opportunity to appeal denial of a claim to the Appeals Committee for a full and fair review. To accomplish that purpose, the claimant (or his duly authorized representative) (a) must request review upon written application to the Appeals Committee within 60 days after he receives written notice of the denial of his claim, (b) may submit written comments, documents, records and other information relating to his claim, (c) may, upon request and free of charge, have reasonable access to, and copies of, all documents, records and other information relevant to his claim, and (d) must be given a review that takes into account all comments, documents,

records and other information submitted by the claimant relating to his claim, without regard to whether such information was submitted or considered in the initial benefit determination.

9.5Review Procedure. Decision on review of a denied claim shall be made in the following manner: (a) the decision on review shall be made by the Appeals Committee, which may, in its discretion, hold a hearing on the denied claim; (b) the Appeals Committee shall make its decision within a reasonable period of time, but not later than 60 days after the Appeals Committee receives the request for review, unless special circumstances require extension of time, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review; (c) if such an extension of time for review is required, written notice of the extension shall be furnished to the claimant prior to the commencement of the extension and shall indicate the special circumstances requiring an extension and the date by which the Appeals Committee expects to render its decision; (d) the decision on review shall be in writing, and, in the case of a benefit denial, shall set forth, in a manner calculated to be understood by the claimant: (1) the specific reason or reasons for the denial, (2) reference to the specific Plan provisions on which the denial is based, and (3) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of all documents, records and other information relevant to the claimant’s claim for benefits.

9.6Appeals Committee.For purposes of this Article 9, the Appeals Committee shall consist of a committee of at least three but not more than five individuals appointed by the Board of Directors of the Company.

Article 10

Amendments and Termination

10.1Amendments. The Company may amend the Plan, in full or in part, at any time and from time to time, provided that any such amendment shall not affect the Restoration Benefit that has accrued to the Participants (based on the Plan provisions and Income and Benefit Limitations then in effect) prior to the effective date of such amendment, unless the affected Participants consent in writing to such amendment. Any amendment shall be filed with the Plan documents maintained by the Company.

10.2Termination. The Company expects the Plan to be permanent, but necessarily must, and hereby does, reserve the right to terminate the Plan at any time. In the event of the termination of the Plan, the Restoration Benefit that has accrued to the Participants (based on the Plan provisions and Income and Benefit Limitations then in effect) prior to the effective date of the termination shall not be adversely affected unless the affected Participants consent in writing, but a Participant shall not be entitled to any further or future benefit accruals after the termination of the Plan. If the Qualified Plan is terminated for any reason, the Plan is automatically terminated on the effective date of the termination of the Qualified Plan. The Restoration Benefit, to the extent accrued upon termination of the Plan, shall vest only under the terms of Article 7 and shall be calculated and paid only under the terms of Article 4.

Article 11

Miscellaneous

11.1No Guarantee of Employment. The adoption and maintenance of the Plan shall not be deemed to be a policy of employment between the Company and any Participant. Nothing contained herein shall give any Participant the right to be retained in the employ of the Company or any Participating Employer or to interfere with the right of the Company or any Participating employer to discharge any Participant at any time, nor shall it give the Company or any Participating Employer the right to require any Participant to remain in its employ or to interfere with the Participant’s right to terminate employment at any time.

11.2Non-Alienation. No benefit payable at any time under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, or encumbrance of any kind.

11.3 Funding. The Plan, notwithstanding the creation of the Rabbi Trust, is intended

to be unfunded for purposes of Title I of ERISA. The Company and the Participating Employers shall make contributions to the Rabbi Trust in accordance with the terms of the Rabbi Trust. Any funds which may be invested and any assets which may be held to provide benefits under this Plan shall continue for all purposes to be a part of the general funds and assets of the Company and no person other than the Company shall by virtue of the provisions of this Plan have any interest in such funds and assets. To the extent that any person acquires a right to receive payments from the Company or the Participating Employers under this Plan, such rights shall be no greater than the right of any unsecured general creditor.

11.4Applicable Law. The Plan and all rights hereunder shall be governed by and construed according to the laws of the State of Texas, except to the extent such laws are preempted by the laws of the United States of America.

IN WITNESS WHEREOF, effective January 1, 2005, the Company has adopted this Plan on the 27^th day of October2005.

INTERCONTINENTAL LIFE CORPORATION

By: ______________________________

Name: ____________________________

Title: ______________________________

Date: ______________________________

ATTEST:

By: ___________________________

Name: ___________________________

Date: ___________________________

EX-10.68

Exhibit 10.68

RESOLUTION TO TERMINATE THE INTERCONTINENTAL LIFE CORPORATION

DEFINED CONTRIBUTION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

WHEREAS, InterContinental Life Corporation, the "Company", established the InterContinental Life Corporation Defined Contribution Supplemental Executive Retirement Plan, the "DC SERP", effective January 1, 2005 for active plan participants who were (i) listed below and (ii) were Highly Compensated Employees;

Name	2005 Contribution Rate (Percentage of 2005 Compensation)
Davis, Cynthia Hall	0.00%
Kasch, Vincent Lee	0.25%
Rhodes, Lloyd F.	4.25%
Schneider, Kenneth Lee	0.00%
Tritz, Peter A.	5.75%
Walker, Nigel	4.50%
Whitmire, Wayne P.	0.00%

WHEREAS, the benefits provided by the DC SERP were to be determined using the same provisions found in Section 4.1 (f) of the InterContinental Life Corporation Employee Savings and Investment Plan ("the 401(k) Plan"), including IRC Section 401(a)(17) and 415 limits;

WHEREAS, it is now the desire of the Company to terminate the DC SERP as permitted under Section 9.2 of the DC SERP and distribute all contributions made on behalf of participants during the 2005 plan year as a one-time lump sum payment;

BE IT RESOLVED, that the Board of Directors of the Company hereby approves the termination of the InterContinental Life Corporation Supplemental Defined Contribution Executive Retirement Plan and the distribution of all benefits under the plan, and authorizes its officers to take such further steps as are necessary to accomplish this resolution, including any other amendments as may be required by IRC Section 409A and its associated regulations provided such amendments do not materially alter the benefits provided under the DC SERP;

IN WITNESS THEREOF, I do hereby certify that the foregoing is a true and correct copy of an original resolution passed by the InterContinental Life Corporation Board of Directors at a meeting held on the 13^th day of December, 2005.

INTERCONTINENTAL LIFE CORPORATION

By: /s/ Michael P. Hydanus

Name: Michael P. Hydanus

Date: 12/20/2005

ATTEST

By: /s/ Jennifer L. Robinson

Name: Jennifer L. Robinson

Date: 12/20/05

EX-10.69

Exhibit 10.69

RESOLUTION TO TERMINATE THE INTERCONTINENTAL LIFE

CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

WHEREAS, InterContinental Life Corporation, the "Company", established the InterContinental Life Corporation Supplemental Executive Retirement Plan, the "SERP", effective January 1, 2005 for active plan participants in the Qualified Plan who (i) satisfied the Rule of 68 and (ii) were Highly Compensated Employees, where the Rule of 68 was satisfied if the sum of a participant's age in years and fractions thereof and service in years and fractions thereof was at least 68 years as of December 31, 2004;

WHEREAS, the SERP presently permits a lump sum distribution only in the event the present value of the participant's accrued benefit is less than $10,000;

WHEREAS, it is now the desire of the Company to terminate the SERP effective December 30, 2005 as permitted under Section 10.2 of the plan document and to amend the plan immediately prior to termination to pay a lump sum distribution to participants for whom the present value of their accrued benefit exceeds $10,000 provided in no event shall the lump sum payment determined under this sentence be less than $10,000. The present value of such accrued normal retirement benefit shall be determined using a 6.00% interest rate and the applicable mortality table under the SERP;

BE IT RESOLVED, that the Board of Directors of the Company hereby approves the termination of the InterContinental Life Corporation Supplemental Executive Retirement Plan and the immediate distribution of all accrued benefits, and the Board authorizes its officers to take such further steps as are necessary to accomplish this resolution, including any other amendments as may be required by IRC Section 409A and its associated regulations provided such amendments do not materially alter the benefits provided under the SERP;

IN WITNESS THEREOF, I do hereby certify that the foregoing is a true and correct copy of an original resolution passed by the InterContinental Life Corporation Board of Directors at a meeting held on the 13^th day of December, 2005.

INTERCONTINENTAL LIFE CORPORATION

By: /s/ Michael P. Hydanus

Name: Michael P. Hydanus

Date: 12/20/2005

ATTEST

By: /s/ Jennifer L. Robinson

Name: Jennifer L. Robinson

Date: 12/20/05

EX-21.1

Exhibit 21.1

                           SUBSIDIARIES OF REGISTRANT



Family Life Corporation

Family Life Insurance Company

Financial Industries Real Estate Corporation

Financial Industries Service Corporation

Financial Industries Securities Corporation

Financial Industries Service Corporation of Mississippi, Inc.

Financial Industries Sales Corporation of Southern California, Inc.

FIC Insurance Group Services, LLC

FIC Insurance Services, L.P.

FIC Financial Services, Inc.

FIC Realty Services, Inc.

FIC Property Management, Inc.

FIC Computer Services, Inc.

InterContinental Life Corporation

Investors Life Insurance Company of North America

ILG Sales Corporation

ILG Securities Corporation

InterContinental Growth Plans, Inc.

InterContinental Life Agency, Inc.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-63046 on Form S-8 of our reports dated October 27, 2006, relating to the consolidated financial statements and financial statement schedules of Financial Industries Corporation and management's report on the effectiveness of internal control over financial reporting (which report disclaimed an opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting because of a scope limitation and expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting because of material weaknesses and the effects of a scope limitation) appearing in this Annual Report on Form 10-K of Financial Industries Corporation for the year ended December 31, 2004.

DELOITTE & TOUCHE LLP

Dallas, Texas

October 27, 2006

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-63046) of Financial Industries Corporation of our report dated July 29, 2005, except for the current period restatement discussed in Note 2 as to which the date is October 19, 2006, appearing on page F-3 of this Form 10-K.

PricewaterhouseCoopers LLP

Dallas, Texas

October 27, 2006

EX-31.1

Exhibit 31.1

I, Michael P. Hydanus, certify that:

1. I have reviewed this report on Form 10-K of Financial Industries Corporation;

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 officer 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 Rule 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 most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) 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 officer 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 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.

October 27, 2006 /s/ Michael P. Hydanus

Michael P. Hydanus

Interim President and Chief Executive Officer

EX-31.2

Exhibit 31.2

I, Vincent L. Kasch, certify that:

1. I have reviewed this report on Form 10-K of Financial Industries Corporation;

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 officer 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 Rule 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 most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) 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 officer 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 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.

October 27, 2006 /s/ Vincent L. Kasch

Vincent L. Kasch

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Financial Industries Corporation (the “Company”) on Form 10-K for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael P. Hydanus, Interim President and 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, that to my knowledge:

(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 result of operations of the Company.

October 27, 2006 /s/ Michael P. Hydanus

Michael P. Hydanus

Interim President and Chief Executive Officer

This certification accompanies the Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Financial Industries Corporation (the “Company”) on Form 10-K for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Vincent L. Kasch, 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, that to my knowledge:

(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 result of operations of the Company.

October 27, 2006 /s/ Vincent L. Kasch

Vincent L. Kasch

Chief Financial Officer

This certification accompanies the Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.