Financial Industries 10K 2007 Annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2007

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

For the transition period from ________ to ________.

Commission File Number 0-4690

Financial Industries Corporation

(Exact name of registrant as specified in its charter)

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

6500 River Place Boulevard, Building 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 £ 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. YES £ NO x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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.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 £

Accelerated filer x

Non-accelerated filer £

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant on June 30, 2007, based on the closing sales price on the National Quotation Bureau’s Pink Sheet Quotation Service ($5.90), was $56,405,617.

The number of shares outstanding of Registrant’s common stock on February 29, 2008, was 10,240,896.

Forward-Looking Statements

Except for historical factual information set forth in this Annual Report on Form 10-K (“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 market value of Financial Industries Corporation’s (“FIC,” “the Company,” or the “Registrant”) 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) mortality, morbidity and other factors that may affect the profitability of FIC’s insurance products; (4) FIC’s ability to develop and maintain effective risk management policies and procedures and to maintain adequate reserves for future policy benefits and claims; (5) changes in the federal income tax laws and regulations that may affect the relative tax advantages of some of FIC’s products; (6) the effect of regulation and regulatory changes or actions, including those relating to regulation of insurance products and insurance companies; (7) ratings assigned to FIC’s insurance subsidiary by independent rating organizations such as A.M. Best Company; (8) the performance of our investment portfolios; (9) the effect of changes in standards of accounting; (10) the effects and results of litigation; (11) 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 (12) other factors discussed in the Company’s other filings with the Securities and Exchange Commission (“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, except as required by federal securities laws.

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, organized in 1980, engaged primarily in the life insurance business through its ownership of Investors Life Insurance Company of North America (“Investors Life”). FIC and its insurance subsidiary have substantially identical management; officers allocate their time among FIC and its subsidiary in accordance with the needs of the Company’s business. FIC’s executive offices are located at 6500 River Place Boulevard, Building I, Austin, Texas 78730.

Throughout 2006 and the beginning of 2007, FIC continued its efforts to become current in its public filings with the SEC. The Company filed its 2004 Form 10-K and Quarterly Report on Forms 10-Q (“Forms 10-Q”) on October 30, 2006, its 2005 Form 10-K and Forms 10-Q on January 12, 2007, and its 2006 Form 10-K and Forms 10-Q on May 31, 2007. With the filing of the Company’s 2007 first quarter Form 10-Q on July 2, 2007, FIC became current in its public filings under the Securities Exchange Act of 1934.

Recent Developments

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. As part of this strategic initiative, the Company completed the sale of its wholly owned subsidiary, Family Life Insurance Company (“Family Life”), on December 29, 2006 (see “Discontinued Operations - Sale of Family Life Insurance Company” within Management’s Discussion and Analysis). On January 14, 2008, the Company announced the pending, board-approved merger of FIC with an indirect, wholly-owned subsidiary of Americo Life, Inc., subject to customary regulatory approvals, as well as other customary conditions for similar transactions (see “Merger of the Company”).

Merger of the Company

As part of the strategic initiative described above, on January 14, 2008, following the unanimous approval of its Board of Directors, FIC entered into a definitive agreement providing for the merger of the Company with an indirect, wholly-owned subsidiary of Americo Life, Inc., (“Americo”). In the merger, each outstanding share of FIC’s common stock, par value $0.20 per share (other than those shares held by Americo, FIC, any of their respective subsidiaries or any shareholders who perfect appraisal rights under Texas law) will be converted into the right to receive cash in the amount of $7.25, subject to downward adjustment in the event there is an increase in the number of fully-diluted shares of common stock in excess of a specified threshold. The Company estimates that the total value of the transaction is $74.7 million. Following the merger, FIC will become an indirect, wholly-owned subsidiary of Americo. The merger is subject to customary regulatory approvals, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (which was obtained on February 25, 2008) and the approval of the Texas Department of Insurance, as well as other customary conditions for similar transactions, including the approval of the shareholders of FIC pursuant to Texas law. The merger is expected to close in the second quarter of 2008. A copy of the Agreement and Plan of Merger (“Merger Agreement”) with Americo is filed as an exhibit to the Company’s Preliminary Proxy Statement on Schedule 14A filed with the SEC on February 20, 2008.

FIC announced that it will have a special meeting of shareholders on May 15, 2008, for the purpose of approving its proposed merger with Americo. Shareholders as of the record date of March 24, 2008, will be eligible to vote on the proposal.

Concurrently with the execution of the Merger Agreement, the directors and executive officers of FIC entered into voting agreements with Americo pursuant to which each such director or executive officer agreed, among other things, to vote all of their shares of common stock in favor of the approval and adoption of the Merger Agreement.

FIC or Americo may be required to pay a $2.5 million termination fee and/or reimbursement of expenses of up to $500,000 to the other party should certain circumstances occur that result in the termination of the Merger Agreement prior to closing.

As the merger agreement was executed in January 2008, expenses related to the merger will be recorded as incurred during 2008. If the transaction closes and the merger is completed, significant costs will be incurred related to employment change of control agreements in effect for various officers and employees of the Company.

Cessation of New Business

On January 31, 2008, the Company determined that it would immediately cease underwriting new policies. In doing so, FIC terminated its agreements with certain independent insurance agents. FIC will continue to manage its existing block of insurance policies and will continue to earn commissions on policies sold by agents appointed with its subsidiary, ILG Sales Corporation, under marketing agreements with unrelated insurance companies.

Description of the Business

Through January, 2008, the Company marketed and sold life insurance products through agents of its insurance subsidiary, Investors Life. Until December 29, 2006, the Company also marketed and sold life insurance products through another insurance subsidiary, Family Life, which was sold at the end of 2006 (see “Discontinued Operations - Sale of Family Life Insurance Company” within Management’s Discussion and Analysis).

Investors Life is now engaged in administering its existing portfolio of individual life insurance and annuity policies. In 2007, Investors Life derived premium income from 49 states, the District of Columbia, and the U.S. Virgin Islands, in which it was licensed, with the largest amounts, 12%, 8%, 7%, and 7%, derived from Pennsylvania, California, New Jersey, and Ohio, respectively.

Direct statutory premiums received from all types of life insurance policies sold by Investors Life were $32.8 million in 2007, as compared to $33.0 million in 2006 and $33.2 million in 2005. First-year premiums received were $2.7 million in 2007, as compared to $1.5 million in 2006 and $178,000 in 2005. Direct deposits from the sale (first-year and single premiums) of fixed annuity products were $36,000 in 2007, compared to $1,500 in 2006 and $20,000 in 2005. Effective April 1, 2004, the distribution of fixed annuity products was discontinued.

Investors Life also sponsors a variable annuity separate account, through which it has offered single premium and flexible premium contracts. The contracts 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. At December 31, 2007 and 2006, the assets held in the separate account totaled $23.4 million and $25.9 million, respectively. During 2007, 2006 and 2005, the premium received in connection with these variable annuity policies was $34,000, $40,000, and $39,000, respectively, 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 $316.0 million and $325.1 million of deposits under investment, or “wraparound”, annuity policies at December 31, 2007 and 2006, respectively. 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. Revenues from this recaptured business totaled $2.0 million and $1.5 million in 2007 and 2006, respectively. 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 $8.9 million and $9.8 million of assets at December 31, 2007 and 2006, respectively. 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 that were not historically 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 2007, 2006 and 2005, ILG Sales Corporation received override revenues of $131,000, $141,000 and $244,000, respectively, through this distribution system.

Financial Information About Segments

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 including but not limited to a purchased block basis. 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.

Investment of Assets

The Company has retained Conning Asset Management Company (“Conning”) as the investment manager for the Company’s investment assets. Conning 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 Board’s Investment Committee is responsible for the Company’s Investment Policy which provides general portfolio and investment criteria under which Conning makes specific investment decisions. Conning also provides assistance to the Company with its asset/liability management and analysis.

The assets held by Investors Life must comply with applicable state insurance laws and regulations. In selecting investments for the portfolios of Investors Life, 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 below, beginning in late 2005, the Company has allocated small portions of its investments to such securities.

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 in investments that are rated below investment grade. This change in policy provides flexibility to Investors Life to enhance overall portfolio performance under various market conditions or event-driven opportunities.

The Company’s general investment philosophy is to hold fixed maturities for long-term investment. Accordingly, the Company has the ability and intent to hold securities to maturity or until they recover in value. The Company does not anticipate the need to sell securities in unrealized loss positions for liquidity purposes.

At December 31, 2007, invested assets (including cash and cash equivalents) totaled $586 million. Of FIC’s invested assets, 85% were in fixed maturity securities available for sale at December 31, 2007. At December 31, 2007, this fixed maturity portfolio includes 11% in government securities, 67% in corporate obligations, and 22% in mortgage-backed and asset-backed securities.

The Company also maintains a portion of its investment assets in each of the following categories: short-term investments, equity securities, and policy loans.

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

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. In addition, the Company has reduced its staffing from its highpoint of 318 in June 2003 to 88 as of December 31, 2007, thereby substantially reducing operating costs. During December of 2006, and as part of the strategic initiative resulting in the sale of Family Life, 33 positions were eliminated resulting in wages in lieu of notice expenses of approximately $281,000. Substantial additional reductions in workforce are expected as a result of the Company’s decision to cease underwriting of new policies.

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. The Company maintains its own web sites, and separate sites for the policyholders and the agents of both of the insurance affiliates. The Company expects no significant additional investments in data processing facilities are required. The Company expects to make additional efforts in the future to improve work processes and reduce expense levels.

Reinsurance and Reserves

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

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.

Investors Life maintains reinsurance treaties under which it reinsures all of the mortality risks under accidental death benefit policies.

In 1995, FIC’s former insurance subsidiary, 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 was on a co-insurance basis and applied to all covered business with effective dates on and after January 1, 1995. 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 applied to contracts written on or after January 1, 1996. Effective September 30, 2006, Family Life and Investors Life executed recapture agreements which terminated both of these reinsurance agreements.

Investors Life establishes and carries 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 subsidiary 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 subsidiary to maintain certain minimum surplus levels and to file detailed periodic reports with the supervisory agencies in each of the states in which it does business and its business and accounts are subject to examination by such agencies at any time. The insurance laws and regulations of Texas, the domiciliary state of Investors Life, require that it be examined at specified intervals.

Investors Life is subject to periodic examination by the state insurance departments, usually on a three to five-year cycle. The Texas Department of Insurance (“TDI”) began an examination of Investors Life on July 25, 2005 covering the years 1999-2004. On February 5, 2007, TDI issued a report with respect to this examination that highlighted, among other issues, the Company’s failure to provide accurate, complete and timely responses to the TDI requests for information. We attribute this failure to our lack of current financial statements at the time the examination was being conducted and the focus of our efforts on becoming current in our public filings. TDI began an examination of Investors Life for the years ended December 31, 2005 and 2006 in May 2007. The Company is expecting the issuance of the examination report in the second quarter of 2008.

As of the date of this report, Investors Life is current in its filing obligations with respect to audited statutory financial statements, having timely filed its 2006 audited statutory financial statements, due June 1, 2007. The audited statutory financial statements of Investors Life for the year ended December 31, 2004 were due during the month of June 2005 and were filed by Investors Life with the Texas Department of Insurance on May 3, 2006. The audited statutory financial statements of Investors Life for the year ended December 31, 2005 were due June 1, 2006 and were filed with the Texas Department of Insurance on July 10, 2006.

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, Investors Life considers AIDS information in underwriting coverage and establishing premium rates. An evaluation of the financial impact of future AIDS claims is extremely difficult, due in part to insufficient and conflicting data regarding the incidence of the disease in the general population and the prognosis for the probable future course of the disease.

Risk-Based Capital Requirements. The National Association of Insurance Commissioners (“NAIC”) has imposed Risk-Based Capital (“RBC”) 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 minimum capital standard that supplements 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 Investors Life as of December 31, 2007 and December 31, 2006, indicate that the Total Adjusted Capital of Investors Life was above its 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. Investors Life records the effect for guaranty fund assessments or credits in the period such amounts are probable and can be reasonably estimated.

Dividends. Dividends paid by Investors Life 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. In 2005, 2006 and 2007, Investors Life and the Company’s former insurance subsidiary, Family Life, did not make any dividend payments to FIC. Pursuant to statutory limitations, the maximum dividend payment which could be made by Investors Life in 2008 without the prior approval of the TDI is $4.1 million. Investors Life had statutory earned surplus of $40.6 million and $35.8 million at December 31, 2007 and 2006, respectively, and a statutory net gain from operations of $3.9 million and $5.5 million for 2007 and 2006, respectively.

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 accounting principles generally accepted in the United States of America (“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 to pay dividends to FIC.

Insurance Holding Company Regulation. Following the redomestication of Investors Life to Texas in March 2004, it 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 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, Investors Life is not treated as commercially domiciled in any other 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. Investors Life has not experienced any adverse effects to its 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 November 2005, the Department of the Treasury (“Treasury”) released a final rule prescribing minimum standards applicable to insurance companies pursuant to the aforementioned provision in the BSA that requires financial institutions to establish anti-money laundering programs and to define the companies and insurance products that are subject to that requirement. Accordingly, Investors Life has 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.

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. Investors Life has 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 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 Investors Life 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.

Federal Income Taxation. FIC filed a consolidated federal income tax return with its subsidiaries other than Investors Life and ILG Securities (each of which filed a separate federal income tax return) for tax years prior to 2007. Beginning in 2007, FIC is eligible to file a consolidated federal income tax return with all its subsidiaries, including Investors Life and ILG Securities. In accordance with the tax allocation agreements, 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 2007 and 2006, Investors Life had four ratios which were outside the usual ranges, which were primarily related to changes in investment income and changes in premium, product mix, and reserving. The ratios were outside the usual ranges primarily due to a recapture of ceded reinsurance by Family Life from Investors Life during 2006. This recapture occurred prior to the sale of Family Life. For statutory accounting purposes, the recapture affected premium income and change in policy reserves which caused ratios to fall outside the usual ranges in both 2006 and 2007. Excluding the effects of the reinsurance recapture, Investors Life would have had one ratio outside the usual ranges, which related to investment income. Despite the IRIS ratio results, Investors Life continues to maintain capital and surplus positions which significantly exceed RBC and other regulatory requirements.

Ratings

Investors Life is rated by A.M. Best Company, Inc. (“A.M. Best”), a nationally recognized rating agency. Insurance ratings represent the opinion of the rating agency on the financial strength of a company and its capacity to meet the obligations of insurance policies. The insurance financial strength ratings assigned by A.M. Best to Investors Life in 2007 was B, having been upgraded from its 2006 rating of B-. 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.

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, 2007, the Company (including its subsidiaries) had 88 employees, all of whom worked in the Company’s home office operations. At February 29, 2008, the Company had 86 employees. Substantial additional reductions in workforce are expected as a result of the Company’s decision to cease underwriting of new policies.

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. 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.

The merger with Americo might not be consummated in a timely manner, or at all.

In the event that the proposed merger with Americo is not consummated in a timely manner or at all, there may be a significant disruption of FIC’s business, sales, operations, and financial results. FIC’s officers and employees will have to focus extensively on actions required to complete the proposed merger, and FIC will incur substantial transaction costs in connection with the proposed merger even if it is not consummated. In addition, FIC may lose key management or other personnel as a result of the announcement or pendency of the proposed merger.

Pursuant to the terms of the Merger Agreement, FIC is subject to a variety of restrictions on the conduct of its business prior to the closing of the proposed merger or termination of the Merger Agreement, which could delay or prevent FIC from pursuing business opportunities that may arise or preclude actions that would otherwise be advisable.

The Merger Agreement also restricts FIC’s ability to solicit other acquisition proposals, and the $2.5 million termination fee plus reimbursement of up to $500,000 of expenses payable by FIC to Americo upon the occurrence of certain events could have a deterrent effect on the desire of other potential acquirors to propose an alternative transaction that might be more advantageous to FIC’s shareholders.

FIC’s only remedy in the event that Americo terminates the Merger Agreement or otherwise fails to consummate the merger in breach of the Merger Agreement is the payment by Americo of a $2.5 million reverse termination fee plus reimbursement of FIC’s expenses of up to $500,000.

FIC’s decision to cease underwriting new insurance policies and terminate its agreements with certain independent insurance agents will leave FIC in run-off mode in the event the merger with Americo is not consummated.

On January 31, 2008, FIC determined that it would cease underwriting new insurance policies. In connection with this decision, FIC terminated its agreements with certain independent insurance agents. In addition to managing its existing block of insurance policies, FIC will continue to earn commissions on policies sold by agents appointed with its subsidiary, ILG Sales Corporation, under marketing agreements with unrelated insurance companies, but will no longer pursue new business. Accordingly, in the event the merger with Americo is not consummated, FIC will continue as a public company with its principal business in run-off mode.

FIC is a holding company and relies on dividends from its insurance subsidiary, Investors Life; state insurance laws may restrict the ability of Investors Life to pay dividends.

FIC is an insurance holding company whose principal assets consist of the outstanding capital stock of its insurance subsidiary, Investors Life Insurance Company of North America. As a holding company, FIC’s ability to meet its cash requirements, pay principal and interest on any debt, pay expenses related to its affairs and pay dividends on its common stock substantially depends upon dividends from its subsidiary. Applicable state insurance laws generally restrict the ability of insurance companies to pay cash dividends in excess of prescribed limitations without prior approval. Pursuant to statutory limitations, the maximum dividend payment which could be made in 2008 without the prior approval of the TDI is $4.1 million.

If Investors Life capital and surplus falls below certain statutory required levels, regulatory authorities may place Investors Life under regulatory control.

Investors Life is 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, 2007, the total adjusted capital of Investors Life was approximately 536% of its authorized control level risk-based capital, as compared to 584% at December 31, 2006. If this percentage were to decrease, Investors Life may become subject to regulatory action which could have a material adverse effect on our results of operations.

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

Investors Life is subject to regulation and examination by state insurance departments, which could result in regulatory sanctions, such as revocation of licenses to transact business.

Investors Life is subject to regulation and supervision by the states in which it is 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 Investors Life to maintain certain minimum surplus levels and to file detailed periodic reports with the supervisory agencies in each of the states in which it does business, and its business and accounts are subject to examination by these agencies at any time. The insurance laws and regulations of the domiciliary state of Investors Life require that it be examined at specified intervals, usually on a three to five-year cycle. TDI began an examination of Investors Life on July 25, 2005 covering the years 1999-2004. On February 5, 2007, TDI issued a report with respect to this examination that highlighted, among other issues, the Company’s failure to provide accurate, complete and timely responses to the TDI requests for information. We attribute this failure to our lack of current financial statements at the time the examination was being conducted and the focus of our efforts on becoming current in our public filings. TDI began an examination of Investors Life for the years ended December 31, 2005 and 2006 in May 2007. The Company is expecting the issuance of the examination report in the second quarter of 2008.

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

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. 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 Investors Life to market its products or otherwise constrain the nature and scope of our operations.

The delisting of our common stock from Nasdaq may cause fluctuations in the price and volume of our shares and limit access to additional capital.

The delisting of our common stock from Nasdaq may have adverse effects on the Company and its shareholders. 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. 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. You may not be able to sell shares of our common stock without a considerable delay or significant impact on the sale price.

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 Company became current with its SEC reports on July 2, 2007 upon the filing of its Form 10-Q for its fiscal quarter ended March 31, 2007.) 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. Also, our access to capital may be limited until we are able to be relisted on Nasdaq or another trading market.

During the current year, we implemented initiatives for the remediation of material weaknesses in our internal controls which were reported in prior years. If we fail to maintain an effective system of internal controls, we may not be able to provide timely and accurate financial statements.

The Public Company Accounting Oversight Board has defined a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned functions. As used in Auditing Standard No. 5, there is a reasonable possibility of an event, when the likelihood of the event is either “reasonably possible” or “probable.” Accordingly, a material weakness increases the risk that the financial information we report contains material errors.

During the year ended December 31, 2007, initiatives have been implemented for the remediation of the material weaknesses in our internal controls reported in prior years. 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, disrupt our ability to process key components of our results of operations and financial condition timely and accurately and cause us 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.

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 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.

A downgrade in the financial strength ratings of our insurance subsidiaries may increase policy surrenders and withdrawals.

Rating organizations periodically review the financial performance and condition of insurers, including the Company’s insurance subsidiary, Investors Life. In recent years, downgrades of insurance companies have occurred with increasing frequency. In June, 2007, Investors Life was assigned a rating of B by A.M. Best.

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 our insurance subsidiary 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.

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.

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 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, financial condition, and liquidity 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. 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 consolidated statements of operations.

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.

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 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.

In addition, our business depends significantly on effective information systems, and we have many different information systems. 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 business, 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 reserving decisions;

the loss of existing 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.

FIC may have liability for indemnification obligations under the Family Life sale agreement.

FIC, through its wholly owned subsidiary, Family Life Corporation, entered into a definitive agreement on December 8, 2006 for the sale of its wholly owned insurance subsidiary, Family Life, to Manhattan Life for $28.0 million in cash. A copy of the sale agreement with Manhattan Life was filed as an exhibit to the Company’s 2005 Annual Report on Form 10-K. The sale of Family Life was completed on December 29, 2006.

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

Family Life Corporation's obligation to indemnify Manhattan Life is limited to individual or related losses of Manhattan Life that exceed $10,000, and Family Life Corporation is responsible only for the portion of all such losses that exceeds $420,000. Furthermore, the maximum amount that Family Life Corporation can be required to pay Manhattan Life as indemnification under the sale agreement is $8,400,000. Family Life Corporation's indemnification obligations expire on June 29, 2008, except with respect to covenants and agreements of Family Life Corporation that extend beyond such date, including but not limited to the non-competition provisions of the sale agreement, which survive for a period of 5 years following the closing of the sale transaction.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

FIC’s home office is located at River Place Corporate Park (previously called River Place Pointe), 6500 River Place Blvd., Building One, Austin, Texas. The Company occupies Building One of River Place Corporate Park, consisting of approximately 76,143 square feet of space. On June 1, 2005, the Company sold River Place Corporate Park to a non-affiliated party and entered into a lease with the purchaser with respect to Building One, for a five-year term at a rate of $28.00 per square foot, which is above the market rate in effect in June 2005, but was the prevailing rental rate at the time that FIC and its subsidiaries occupied the building in July 2000. The lease provides the Company with a right of cancellation at March 31, 2008. Upon the sale of Family Life in December, 2006, the Company evaluated its office space requirements. Based on this evaluation, the Company entered into sublease transactions with unrelated parties in the first quarter of 2007. Current sublease arrangements are expected to reduce the Company’s rent expense by $221,000 for the year ending December 31, 2008.

During late 2007, the Company notified the lessor of its intent to cancel the River Place Corporate Park lease as of March 31, 2008. Subsequent to this notification, the Company and the lessor entered into an amended lease agreement extending the lease term through March 31, 2009.

The Company also leases approximately 10,000 square feet in Cedar Park, Texas, to house the Company’s printing operations and warehouse storage. During 2007, the monthly base rental for the Cedar Park facility was $9,488. The original lease term ended on March 31, 2008. However, this lease has been extended to September 30, 2008 with a monthly base rental of $10,000.

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.

The Manhattan Life Insurance Company and Family Life Insurance Company v. Family Life Corporation, Investors Life Insurance Company of North America and FIC Insurance Services, L.P.

By a Stock Purchase Agreement dated as of December 8, 2006, the Company’s subsidiary, Family Life Corporation (“FLC”) sold the outstanding shares of common stock of Family Life Insurance Company (“FLIC”) to The Manhattan Life Insurance Company (“Manhattan”). Concurrently, FIC Insurance Services, L.P. (“FICIS”) and FLIC executed an Administrative Services Agreement under the terms of which FICIS agreed to provide certain administrative and management services to FLIC for a period of time following the stock sale. On April 17, 2007, Manhattan and FLIC filed suit against FLC, Investors Life and FICIS in the 215th Judicial District Court of Harris County, Texas. The suit claims that FLC has breached certain provisions of the Stock Purchase Agreement by competing with FLIC and accepting insurance from active accounts of FLIC; that FICIS has breached the Administrative Services Agreement and fiduciary duties supposedly owed to FLIC; and that all defendants have tortiously interfered with existing and prospective contracts. The Company has filed a counterclaim for amounts due and owing by FLIC for services performed pursuant to the Administrative Services Agreement. The Company intends to vigorously defend the suit and prosecute the counterclaim. The parties are currently engaging in discovery. The trial is currently set for May 19, 2008, but the parties have agreed to move the trial to September 2008 subject to court approval. See Note 2 in the accompanying consolidated financial statements regarding the sale of Family Life Insurance Company.

In the opinion of the Company’s management, it is not currently possible to estimate the impact, if any, that the ultimate resolution of this legal proceeding will have on the Company’s results of operations, financial position or cash flows. Accordingly, no accrual for possible losses has been recorded in the consolidated financial statements for this legal proceeding.

Equita Financial and Insurance Services of Texas, Inc. and M&W Insurance Services, Inc. v. Financial Industries Corporation

In June of 2003, the Company and its subsidiaries entered into a number of related agreements with (among others) Equity Financial and Insurance Services of Texas, Inc. (“Equita”) and M&W Insurance Services, Inc. (“M&W”). In their original and First Amended Petitions filed in Travis County, Texas, Equita and M&W alleged that the Company had failed to comply with obligations owed to Equita and M&W under certain of those agreements, and, further, that the Company’s conduct constitutes statutory and common-law fraud, negligent misrepresentation, and violations of the Texas Securities Act. Equita and M&W sought rescission of their $3 million purchase of Company stock from the Company’s founder and former Chairman, as well as unspecified additional damages. The Company’s subsidiaries, Investors Life and Family Life, filed a Petition in Intervention asserting that Equita has failed to comply with obligations owed to Investors Life and Family Life.

The Company reached a settlement with Equita and M&W and, together with Investors Life, was dismissed from the suit on November 1, 2007. As part of the settlement, the Company paid Equita $250,000 on October 25, 2007. The settlement was reflected as an operating expense in the Company’s 2007 consolidated statement of operations. The suit remains pending, however, against Family Life, an entity no longer owned by the Company. As part of this settlement, the Company agreed to indemnify Equita and M&W for certain sums incurred after November 1, 2007 as part of the litigation with Family Life.

T. David Porter v. Financial Industries Corporation

In May of 2006, the Company was served with this petition in which the plaintiff, who claims to be a Company shareholder, asked the Court to order the Company to hold an annual meeting of shareholders pursuant to Article 2.24(B) of the Texas Business Corporation Act, to send notice of the meeting at Company expense, and to provide him with a list of shareholders as of the record date. The petition does not seek damages but does ask for unspecified attorneys’ fees and costs of suit. At that time, FIC had been unable to hold an annual meeting at which its shareholders could be fully informed, or which could be attended by a substantial portion of its shareholders, because the Company was unable to comply with Rule 14a-3 of the Securities Exchange Act of 1934, and thus could not provide an annual report to shareholders or solicit proxies in connection with an annual meeting.

On August 7, 2006, the Company agreed, among other things, to hold an annual shareholders meeting for the election of directors on December 6, 2006. On the appointed date, however, a quorum was not in attendance. On December 12, 2006, FIC filed a Motion for Summary Judgment seeking dismissal of Porter’s suit on the grounds that Mr. Porter obtained all relief sought by his petition. In response, Mr. Porter applied for a temporary restraining order and temporary injunction requiring the Company to convene one or more additional meetings of shareholders.

The District Court held a hearing on Porter’s application, and on December 22, 2006, entered an order requiring, among other things, that FIC hold an annual shareholders meeting for the election of directors on January 16, 2007, but that if a quorum was not present on that date, FIC would not be required to hold an annual meeting of shareholders at any time before July 17, 2007. The meeting was held on January 16, 2007, but again no quorum was present. FIC did thereafter hold an annual meeting of shareholders before the court-imposed July 17, 2007 deadline.

Because Mr. Porter had taken no action since his application for a temporary restraining order and temporary injunction in December, 2006, FIC filed a motion for summary judgment on October 10, 2007 requesting final adjudication of the suit. On November 19, 2007, Mr. Porter agreed to dismiss his suit against the Company, and the case has since been dismissed.

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 results of operations, financial position, or cash flows.

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, 2007.

PART II

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

Market Information

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

The following table sets forth the quarterly high and low closing prices for FIC common stock for 2007, 2006 and 2005. 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
	2007				2006				2005
	High		Low		High		Low		High		Low

First Quarter	$	7.50	$	6.40	$	8.70	$	8.00	$	7.90	$	6.95
Second Quarter		6.85		5.87		9.00		8.00		8.95		7.40
Third Quarter		6.15		5.60		8.90		8.30		8.43		6.75
Fourth Quarter		5.90		5.00		8.50		7.30		8.50		7.40

Holders

As of February 29, 2008, there were approximately 16,653 holders of record of FIC common stock.

Dividends

No dividends were declared by the Company in 2007, 2006 or 2005.

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 subsidiary to pay dividends is restricted by the insurance laws of its domiciliary state. See Item 1, Description of the Business - Regulation - Dividends.

Equity Compensation Plans

The following table presents information regarding the Company’s equity compensation plans as of December 31, 2007:

	(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:
FIC 2004 Incentive Stock Plan		130,000	$	6.75		310,000
FIC Stock Option Plan for Non-Employee Directors		200,000	$	5.98		200,000
Equity compensation plans not approved by security holders:
Prouty Stock Option Agreement		150,000	$	7.45		-

Total		480,000	$	6.65		510,000

Recent Sales of Unregistered Securities

During the year ended December 31, 2007, FIC did not make any sales of securities that were not registered under the Securities Act of 1933, as amended (the “Securities Act”).

Issuer Purchases of Equity Securities

Purchases of common stock made by or on behalf of the Company or its affiliates during the year ended December 31, 2007 are set forth below:

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

October 1 - October 31, 2007		10,000	$	5.50		10,000		490,000

November 1 - November 30, 2007		53,100	$	5.54		53,100		436,900

December 1 - December 31, 2007		-				-		436,900

		63,100				63,100		436,900

(1)

On October 25, 2007, the Company announced a share repurchase program to acquire up to 500,000 of the Company’s common shares. At December 31, 2007, 436,900 shares were available for repurchase under this authorization. Under this authorization, the Company may purchase its common stock in the open market or in privately negotiated transactions based on prevailing market conditions and other factors.

During the period from the announcement of the program until December 31, 2007, the Company repurchased 63,100 shares of its outstanding common stock at an aggregate cost of $349,000 on the open market in nondiscretionary transactions in order to provide greater value to the Company’s shareholders.

Stock Performance Graph

The following graph shows FIC’s cumulative total shareholder return during the five fiscal years ending with fiscal 2007. 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 December 31, 2002 in shares and in each of the indices shown and assumes that all of the dividends were reinvested.

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data includes the accounts of Financial Industries Corporation and its subsidiaries.

	Year Ended December 31,
	2007		2006			2005			2004			2003
	(In thousands, except per share data)
Statement of Operations Information:

Total revenues	$	76,861	$	72,413		$	75,556		$	71,198		$	77,188

Income (loss) from continuing operations before federal income taxes, discontinued operations, and cumulative effect of change in accounting principle	$	3,984	$	3,624		$	1,562		$	(12,973	)	$	(17,750	)

Federal income tax expense (benefit)		388		2,909			620			(913	)		(2,419	)
Income (loss) from continuing operations before discontinued operations, and cumulative effect of change in accounting principle		3,596		715			942			(12,060	)		(15,331	)

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

Income (loss) before cumulative effect of change in accounting principle		3,596		(24,782	)		(165	)		(14,567	)		(23,583	)

Cumulative effect of change in accounting principle (2)		-		-			-			229			-

Net income (loss)	$	3,596	$	(24,782	)	$	(165	)	$	(14,338	)	$	(23,583	)

Net income (loss) per share from continuing operations:
Basic	$	0.35	$	0.07		$	0.09		$	(1.23	)	$	(1.59	)
Diluted	$	0.35	$	0.07		$	0.09		$	(1.23	)	$	(1.59	)

Net income (loss) per share:
Basic	$	0.35	$	(2.51	)	$	(0.02	)	$	(1.46	)	$	(2.44	)
Diluted	$	0.35	$	(2.51	)	$	(0.02	)	$	(1.46	)	$	(2.44	)

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

Balance Sheet Information, as of December 31:
Total assets of continuing operations	$	987,460	$	1,038,311		$	1,020,902		$	1,070,263		$	1,102,769
Total assets	$	987,460	$	1,038,311		$	1,180,063		$	1,240,757		$	1,286,044
Long-term obligations of continuing operations (3)	$	15,000	$	15,000		$	15,000		$	15,000		$	15,000
Total liabilities of continuing operations	$	920,005	$	977,630		$	991,010		$	1,040,764		$	1,063,908
Total liabilities	$	920,005	$	977,630		$	1,097,992		$	1,153,214		$	1,181,735
Total shareholders’ equity	$	67,455	$	60,681		$	82,071		$	87,543		$	104,309

(1)

In 2006, the Company sold one of its insurance subsidiaries as described in the accompanying consolidated financial statements in Note 2, “Discontinued Operations – Sale of Family Life Insurance Company.”

(2)

In 2004, net income and earnings per share were affected by the cumulative effect of a change in accounting principle of $229,000. This amount represents the cumulative effect of changes in accounting recognition for sales inducements under Statement of Position 03-01, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts,” specifically bonus interest. 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.

(3)

Discontinued operations had no long-term obligations.

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”.

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.

FIC reported net income of $3.6 million in 2007 compared to net losses of $24.8 million and $165,000 in 2006 and 2005, respectively. The net loss incurred during 2006 primarily includes losses from the discontinued operations of the Company’s wholly-owned subsidiary, Family Life, totaling $25.5 million. This is offset by income from continuing operations of $0.7 million. The relatively small net loss for 2005 is largely attributable to lower policyholder benefits and operating expenses, along with increases in net realized gains on investments.

At the end of 2007, the equity of FIC’s shareholders totaled $67.5 million, up from $60.7 million at the end of 2006. This $6.8 million increase in shareholders’ equity primarily reflects the Company’s net income for the year and other comprehensive income of $3.8 million.

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 become ill and 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.

Merger of the Company

As part of the strategic initiative previously described, on January 14, 2008, following the unanimous approval of its Board of Directors, FIC entered into a definitive agreement providing for the merger of the Company with an indirect, wholly-owned subsidiary of Americo Life, Inc., (“Americo”). In the merger, each outstanding share of FIC’s common stock, par value $0.20 per share (other than those shares held by Americo, FIC, any of their respective subsidiaries or any shareholders who perfect appraisal rights under Texas law) will be converted into the right to receive cash in the amount of $7.25, subject to downward adjustment in the event there is an increase in the number of fully-diluted shares of common stock in excess of a specified threshold. The Company estimates that the total value of the transaction is $74.7 million. Following the merger, FIC will become an indirect, wholly-owned subsidiary of Americo. The merger is subject to customary regulatory approvals, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (which was obtained on February 25, 2008) and the approval of the Texas Department of Insurance, as well as other customary conditions for similar transactions, including the approval of the shareholders of FIC pursuant to Texas law. The merger is expected to close in the second quarter of 2008.

Cessation of New Business

Discontinued Operations – Sale of Family Life Insurance Company

On December 29, 2006, Financial Industries Corporation completed the sale of its wholly owned subsidiary, Family Life Insurance Company, to The Manhattan Life Insurance Company for $28.0 million in cash. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the consolidated financial statements for all periods presented reflect the assets, liabilities and operating results of Family Life Insurance Company as discontinued operations, adjusted for certain activities as described below.

Proceeds from the sale were used to improve FIC’s capital structure by retiring approximately $15.4 million of intercompany debt and for general corporate purposes. In addition, FIC agreed to retain the liabilities associated with Family Life’s defined benefit pension plan totaling $3.3 million, in exchange for which it received a corresponding transfer of assets from Family Life. FIC also purchased 324,320 shares of the FIC common stock owned by Family Life at a price of $6.80 per share.

Prior to the sale, the Company transitioned the sales force of Family Life to a new division of Investors Life, FIC’s remaining insurance subsidiary. Although Investors Life is now selling similar products as those that were sold by Family Life, there are notable differences. The insurance is written on Investors Life policy forms and leads are no longer obtained from lending institutions. Leads are now purchased through other sources and the focus is on a different market demographic than the previous Family Life target market. The new division also now sells final expense insurance products, which was not a market focus for Family Life. Additionally, as a condition of the sales agreement, the new division of Investors Life is prohibited from selling products to existing policyholders and related customers of Family Life for five years.

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

Prior to the sale, Investors Life assumed certain universal life insurance and annuity contracts written by Family Life under reinsurance treaties between the companies. Effective September 30, 2006, Family Life and Investors Life executed recapture agreements related to these reinsurance treaties effectively terminating these treaties and removing Investors Life from any liability for life insurance and annuity contracts written by Family Life. Accordingly, all of the assets, liabilities, revenues and costs associated with these universal life insurance and annuity contracts are included in discontinued operations.

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

Family Life owned 648,640 shares of FIC common stock prior to the sale. Such shares were reflected as treasury stock in the Company’s historical consolidated financial statements. Immediately preceding and as a condition of the sale of Family Life, 324,320 of these shares were acquired by the Company and the remaining 324,320 shares remained with Family Life at the time of the sale. Accordingly, the shares that remained with Family Life are now reflected as outstanding common stock shares as of December 31, 2006, and have been reflected as a sale of treasury stock in the accompanying consolidated financial statements.

Family Life shared certain operating costs, including personnel, premises, equipment and software, and other office and administrative expenses with FIC and its other subsidiaries through various sharing agreements. These agreements with Family Life were terminated upon its sale and Family Life (now the wholly-owned subsidiary of Manhattan Life) did not retain any employees, equipment, software or liability for leases. Accordingly, the discontinued operations of Family Life were adjusted to eliminate the estimated continuing expenses associated with these shared operating costs.

Loss on discontinued operations for 2006, net of taxes, totaled $25.5 million which consists of a $1.1 million loss on operations during the year and a $24.4 million loss on the sale of Family Life.

In conjunction with the sale, Family Life also entered into an administrative services agreement with the Company for a three month period following the sale. Pursuant to the agreement, the Company provided administrative services for Family Life through March 31, 2007, at which time Manhattan Life assumed all responsibilities for administering the Family Life business. The Company earned fees totaling $807,000 in the first quarter of 2007 for services performed for Family Life in accordance with the agreement. See Note 13 in the accompanying consolidated financial statements regarding litigation with Manhattan Life.

Effective with the beginning of the fourth quarter of 2007, the Company made the decision to cease sales of mortgage protection term products. A resulting impact of this decision is the accounting implications for the previously described deferred revenue liability recorded in conjunction with the Family Life coinsurance agreement. As the Company will no longer sell any mortgage term products subject to the coinsurance agreement, the Company recognized $1.3 million of the deferred revenue liability in the quarter ended September 30, 2007. This amount was reflected in other income in the accompanying consolidated statement of operations. The remaining $100,000 of the original liability balance relates to policies sold and recorded in the period from April 1, 2007 through September 30, 2007 which were subject to the coinsurance agreement. This amount will be amortized to income in future periods over the lives of these policies. Amortization of this remaining liability totaling $7,500 has been recognized through December 31, 2007.

The following sections of this Item 7 reflect Family Life as discontinued operations pursuant to SFAS 144 as described above. Accordingly, unless otherwise noted, amounts and analysis in this Item 7 reflect the continuing operations of FIC and its subsidiaries, exclusive of Family Life. References to income and loss from operations are identified as continuing operations or discontinued operations, while references to net income or net loss reflect the consolidated net results of both continuing and discontinued operations.

Financial Condition

During 2007, the equity of the shareholders of the Company (that is, the excess of the Company’s assets over its liabilities) increased $6.8 million. The change in FIC’s shareholders’ equity is primarily due to the following:

Net income for the year of $3.6 million

Reduction to beginning retained earnings of $1.2 million for the implementation of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”) related to uncertain income tax positions as described under “Recent Adoption of Accounting Pronouncements”

Combined net increase of $539,000 in additional paid-in capital and treasury stock as follows:

$363,000 related to the issuance of stock options during the year as described in Note 11 to the accompanying consolidated financial statements,

$354,000 for common shares issued to Mr. Boisture as described in Note 11 to the accompanying consolidated financial statements,

$171,000 for common shares issued in lieu of cash for portions of Company Board of Directors fees,

$349,000 for the purchase of the Company’s common shares into treasury.

Net decrease in accumulated other comprehensive loss of $3.8 million for items as follows:

Decrease in net unrealized losses on fixed maturities available for sale of $3.7 million,

Net depreciation of equity securities totaling $774,000,

Net decrease in pension liabilities totaling $912,000.

Assets

At the end of 2007, FIC had $648.7 million of assets under its direct management, exclusive of separate account assets. In broad terms, these funds were invested as follows:

	December 31,				Percentage
	2007		2006		change
	(In thousands)

Investments in financial instruments:
Cash and short-term investments	$	49,439	$	63,076		-21.6	%
Fixed maturity securities		499,274		520,957		-4.2	%
Policy loans		27,959		30,189		-7.4	%
Equity securities		9,573		9,805		-2.4	%
Accrued investment income		6,592		6,772		-2.7	%
Total investments in financial instruments		592,837		630,799		-6.0	%

All other managed assets:
Deferred policy acquisition costs		15,285		14,429		5.9	%
Present value of future profits of acquired business		6,565		7,749		-15.3	%
Other		34,030		34,347		-0.9	%
All other managed assets		55,880		56,525		-1.1	%


Total managed assets	$	648,717	$	687,324		-5.6	%

Total managed assets decreased during 2007 by $38.6 million, or 5.6%. This overall decrease was largely related to the reduction in cash and short-term investments and fixed maturity securities, utilized for the run-off of the Company’s annuity and life insurance business in force.

The Company’s life insurance subsidiary has an investment management agreement with Conning. Under this agreement, Conning manages the investment security portfolio 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 subsidiary in recent years. The new policies reiterate compliance with legal requirements of state insurance laws and regulations that are applicable to the Company. They also emphasize sensitivity to the way that FIC’s liabilities are likely to change over time and with changes in general interest rate levels. In practical terms, this means that the Company now focuses almost all of its investment in investment-grade securities, keeping the schedule of anticipated asset maturities in line with its projected cash needs. It also means that the Company attempts to keep the duration of its investment assets (a measure of the sensitivity of their value to changes in interest rates) in line with the duration of the Company’s liabilities. At December 31, 2007, the Company’s holdings of below investment grade securities totaled approximately 5.3% of the fixed maturity securities portfolio.

Since the engagement of Conning as the Company’s investment manager in October 2003, the Company has realigned its portfolio, decreasing its investment in mortgage-backed securities (including asset-backed securities) significantly, from 35.8% in 2004 to 21.8% at December 31, 2007 as a percentage 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 48.3% in 2004 to 67.4% at December 31, 2007, 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 66.0% of the market value of FIC’s mortgage-backed securities at December 31, 2007, are sensitive to prepayment and extension risks. FIC’s insurance subsidiary has reduced the risk of prepayment associated with mortgage-backed securities by investing in planned amortization class (“PAC”), target amortization class (“TAC”) instruments and scheduled bonds. These investments are designed to amortize in a predictable manner by shifting the risk of prepayment of the underlying collateral to other investors in other tranches (“support classes”) of the CMO. At December 31, 2007, PAC and TAC instruments and scheduled bonds represented approximately 23.7% of the market value of FIC’s mortgage-backed securities. Sequential and support classes represented approximately 22.4% of the market value of FIC’s mortgage-backed securities at December 31, 2007.

The Company’s investment portfolio does not have significant exposure to the subprime mortgage market. The portfolio holds $3.9 million par value of home-equity loan asset-backed securities. The securities have Standard & Poor’s ratings of AAA, were purchased in early 2003, and are comprised of loans originated in 2002. The performance of the underlying collateral, pools of fixed-rate mortgage loans, has been satisfactory, and the loans have paid down to under 50% of original par value. As of December 31, 2007, the aggregate unrealized loss on these bonds is approximately $12,000, which management believes can be primarily attributed to increases in market interest rates.

An allocation by security type of the Company’s investments in fixed maturities as of December 31, 2007 and 2006 is detailed below.

	December 31,
	2007			2006

Corporate		67.4	%		61.1	%
Mortgage-backed and asset-backed		21.8	%		22.0	%
U.S. Treasury securities and obligations of U.S. government agencies and corporations		7.0	%		13.2	%
States, municipalities and political subdivisions		3.8	%		3.7	%

Total fixed maturities		100.0	%		100.0	%

During 2007, net unrealized losses on fixed maturities available for sale decreased $7.0 million, prior to the effects of deferred policy acquisition costs and deferred taxes. The decrease in unrealized losses was primarily related to decreases in market interest rates. While interest rates have fluctuated rather significantly during 2007, the market interest rates at December 31, 2007 are now lower than rates at year end 2006.

FIC’s equity securities consist primarily of its investment in the investment funds underlying the separate accounts business of Investors Life. As of December 31, 2007, FIC’s equity securities totaled $9.6 million, compared to $9.8 million at December 31, 2006. The decrease is due to the declining performance of the equity markets at the end of 2007 resulting in the depreciation of the investment funds.

Agency advances and other receivables, totaling $3.4 million and $929,000 at December 31, 2007 and 2006, respectively, consist primarily of agent balances, federal income taxes recoverable, receivables for securities, and other receivables. This increase of $2.5 million is attributed predominately to the implementation of FIN 48 as described in more detail under “Recent Adoption of Accounting Pronouncements.” Liabilities for unrecognized tax benefits, previously recorded as a reduction to current tax receivables, were reclassified and reported as other liabilities at March 31, 2007 and for subsequent periods in accordance with the new reporting requirements of FIN 48.

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 increase in the Company’s DAC from December 31, 2006 to December 31, 2007, reflects that the capitalization of acquisition costs associated with sales of new insurance policies exceeded the amortization of such amounts capitalized in prior years. The present value of future profits of acquired business is the capitalized acquisition cost of blocks of insurance business that 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. These two assets are also impacted by the net run-off in business that the Company experienced in 2007 and 2006, as shown in the following table.

	December 31,							Percentage
	2007		2006		Change			Change
	(In billions, except percentages and policies in force)

Policies in force		98,242		103,231		(4,989	)		-4.8	%
Life insurance in force:
Traditional life insurance	$	0.9	$	1.0	$	(0.1	)		-10.0	%
Universal life insurance	$	2.6	$	2.8	$	(0.2	)		-7.1	%
Annuity funds on deposit	$	0.10	$	0.11	$	(0.01	)		-9.1	%

For prior year comparative purposes, the changes for in-force from 2005 to 2006 for policies, traditional life insurance, universal life insurance, and annuity funds on deposit were (11.8)%, 0.0%, (6.7)%, and (15.4)%, respectively.

Investors Life had $338.7 million of separate account assets as of December 31, 2007 (not including the value of the Company’s own start-up investment in one of the accounts), as compared to $351.0 million at the end of 2006. 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) $316.0 million held in custodian accounts in connection with investment annuity contracts. The investment annuity business was previously 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. 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. This business increased other revenues by approximately $489,000 and $1.3 million during 2007 and 2006, respectively. However, as this is a closed block of business, annual revenues are expected to decrease as the policies in force decline. Investors Life is not marketing new separate account annuity contracts.

Liabilities

The Company’s insurance-related liabilities (future policy benefits and contractholder deposit funds) were $539.8 million at December 31, 2007, as compared to $570.8 million at December 31, 2006. The decrease in contractholder deposit funds and future policy benefits reflects the business run-off as previously described above. Contractholder fund withdrawals during 2007 were $57.0 million compared to contractholder fund deposits of $23.1 million during 2007, reflecting the primary reason for the decrease in the related liability.

Other liabilities, which totaled $19.2 million at December 31, 2007, compared to $34.0 million at December 31, 2006, consist primarily of accrued expenses, policyholder suspense liabilities, pension plan liabilities, income taxes payable, amounts due on unsettled security transactions, and amounts held as agent or trustee. This decrease in other liabilities is partially due to amounts due for unsettled transactions for purchased securities. There were no amounts due for unsettled transactions at December 31, 2007 as compared to a balance of $15.2 million at December 31, 2006. This decrease from unsettled transactions was partially offset by the reporting of a liability for unrecognized tax benefits totaling $5.5 million resulting from the implementation of FIN 48 as disclosed further in this section.

The ILCO pension plan has a projected benefit obligation at year-end 2007 totaling $18.1 million in comparison to the fair value of plan assets of $19.4 million. The difference in these amounts reflects a funded status of approximately $1.3 million, which is reflected as a pension asset in other assets in the accompanying consolidated financial statements. The Family Life pension plan has a projected benefit obligation at year-end 2007 totaling $7.2 million in comparison to the fair value of plan assets of $6.1 million. The difference in these amounts reflects an unfunded status of approximately $1.1 million, which is reflected as a pension liability in other liabilities in the accompanying consolidated financial statements. Amounts included as components of the projected benefit obligation which have not been recognized as an expense are included in accumulated other comprehensive income.

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

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

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, 2007, 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 this ratio was 6.8% at December 31, 2007, compared to 5.8% at December 31, 2006. If separate account assets were not included (which management believes is appropriate,) this ratio would have been higher by 3.6% and 3.0% at December 31, 2007 and 2006, respectively. The increase in the ratio in 2007 is primarily due to the net income of $3.6 million, declines in the unrealized loss on fixed maturity securities available for sale included in other comprehensive income of $3.7 million, and the decline in total managed assets of $38.6 million. Management believes that its current capital is sufficient to meet the Company’s liabilities.

Investors Life is subject to regulation under state law. Among other requirements, these state laws and regulations impose capital adequacy requirements on insurance companies. Using a calculation that takes into account the quality, liquidity, maturities, and amounts of its assets and liabilities, Investors Life is required to calculate its “risk-based capital” (or “RBC”). Investors Life’s total adjusted capital must exceed 200% of the authorized control level RBC to avoid supervisory activity by the insurance regulators. The RBC solvency margins for Investors Life at December 31, 2007 and 2006 were in excess of NAIC minimum standards. At December 31, 2007 and 2006, the RBC ratios for Investors Life were 536% and 584%, respectively.

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 2007 and 2006, Investors Life had four ratios which were outside the usual ranges, which were primarily related to changes in investment income and changes in premium, product mix, and reserving. The ratios were outside the usual ranges primarily due to a recapture of ceded reinsurance by Family Life from Investors Life during 2006. This recapture occurred prior to the sale of Family Life. For statutory accounting purposes, the recapture affected premium income and change in policy reserves which caused ratios to fall outside the usual ranges in both 2006 and 2007. Excluding the effects of the reinsurance recapture, Investors Life would have had one ratio outside the usual ranges, which related to investment income. Investors Life continues to maintain capital and surplus positions which significantly exceed risk-based capital (“RBC”) and other regulatory requirements.

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

Although the Company determined on January 31, 2008 that it would cease underwriting new policies as previously described, the Company does not anticipate any negative effects to its capital adequacy in the foreseeable future as a result of this decision.

Results of Operations

Results of operations for 2007, 2006, and 2005 were net income of $3.6 million, and net losses of $24.8 million, and $165,000, respectively. However, in analyzing the Company’s results of operations, a separation of results between continuing and discontinued operations provides a more meaningful view. As previously described, the Company sold Family Life resulting in a loss from discontinued operations totaling $25.5 million in 2006, which consists of a $1.1 million loss on operations during the year and a $24.4 million loss on the sale. Losses from discontinued operations were $1.1 million in 2005.

Income from continuing operations totaled $3.6 million, $715,000 and $942,000 in 2007, 2006 and 2005, respectively.

A summary of the Company’s results of operations is as follows:

	Year Ended December 31,
	2007		2006			2005
	(In millions)

Income from continuing operations	$	3.6	$	0.7		$	0.9
Loss from discontinued operations		-		(1.1	)		(1.1	)
Loss from sale of discontinued operations		-		(24.4	)		-
Net income (loss)	$	3.6	$	(24.8	)	$	(0.2	)

In 2007, income from continuing operations was affected by the following items:

(1)

Premium revenues increased $2.4 million in 2007 compared to 2006 primarily due to increased sales of mortgage protection term ($1.0 million) and final expense whole life ($1.2 million) insurance products.

(2)

Increases in net investment income of $1.7 million are due to dividend income received on investments in equity securities, along with some improvement in investment yields for the year ended December 31, 2007.

(3)

Other revenues increased $2.1 million in 2007 primarily due to the recognition of deferred revenue related to the Company’s coinsurance agreement with Family Life of $1.3 million and fees earned for services performed under an administrative services agreement with Family Life of $807,000.

(4)

Net realized gains on real estate declined due to realized gains in 2006 from the sale of the Company’s remaining real estate properties classified as held for sale.

(5)

Policyholder benefits and expenses increased during 2007 by $4.1 million primarily attributable to significantly higher death benefits, along with increases in traditional policy reserve expenses resulting from the higher traditional premium production.

(6)

Earned insurance charges decreased $1.4 million partially offset by a decrease in interest expense on contractholder deposit funds of $751,000, both due primarily to the general runoff of the Company’s universal life insurance and annuity business.

(7)

Amortization of deferred policy acquisition costs increased $910,000, primarily due to increased sales of traditional business by Investors Life since the third quarter of 2006 and the amortization relating to the DAC capitalized on these sales.

(8)

Operating expenses declined $239,000 in 2007. The Company is now experiencing lower audit and actuarial fees compared to prior years. However, the Company also recognized compensation expense in 2007 of $363,000 related to the requisite service period as discussed in Note 11 to the accompanying consolidated financial statements.

In 2006, income from continuing operations was affected by the following items:

(1)

Premium revenues increased $0.9 million in 2006 compared to 2005 primarily due to increased sales of mortgage protection term ($0.2 million) and final expense ($0.6 million) insurance products.

(2)

Market interest rates increased, allowing for the investment of cash and short-term investments in fixed maturity securities with higher interest yields, thus allowing for increased investment income during 2006. With the sale of the River Place Corporate Park property in June 2005, the Company had additional funds to invest in the latter half of 2005 and during 2006. Net realized gains on real estate were $517,000 in 2006 compared to $9.2 million in 2005, with the decline attributable to the sale of River Place Corporate Park in 2005.

(3)

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

(4)

Operating expenses continued to decline in 2006, reflecting reductions of $1.2 million.

(5)

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

(6)

Federal income tax expense was significantly higher reflecting an effective tax rate of 80.3% in 2006. The higher taxes were due primarily to an increase in the Company’s valuation allowance for deferred taxes resulting from the sale of Family Life. The sale of Family Life removed the source of income supporting certain deferred tax assets at the FIC consolidated level.

In 2005, income from continuing operations was affected by the following items:

(1)

Gains were recognized on the sales of River Place Corporate Park of $8.5 million and other real estate of $761,000. Lease income, which is included in net real estate income, declined approximately $1.2 million in 2005, as compared to 2004, as a result of these sales.

(2)

Significant auditing, actuarial, accounting, consulting, and legal fees continued to be incurred in 2005, although reduced from the level of 2004, as a result of the audit of the Company’s financial accounts and resulting restatement of prior years’ consolidated financial statements included in its 2004 Form 10-K filing, along with various litigation matters continuing into 2005. These fees totaled $5.6 million in 2005, reflecting a $1.3 million decrease from 2004.

(3)

Reductions of $5.8 million were noted in policyholder benefits and expenses, as compared to 2004. These were primarily attributable to lower death benefits and policy surrenders.

(4)

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

The above described items need to be taken into consideration in drawing comparisons between the results from continuing operations in 2007 and other periods.

Revenues

Components of revenue by type are detailed below:

	Year Ended December 31,
	2007		2006		2005
	(In millions)

Premiums, net	$	8.3	$	5.9	$	5.0
Earned insurance charges		30.4		31.7		32.8
Net investment income		31.0		29.3		25.8
Real estate income, net		-		-		0.6
Net realized gains on real estate		-		0.6		9.2
Net realized gains (losses) on fixed maturities and other		0.1		-		(0.6	)
Other		7.1		4.9		2.7
Total revenues	$	76.9	$	72.4	$	75.5

Premium revenues reported for traditional life insurance products are recognized when due. Improvements were shown in both renewal and first-year premiums during 2006 and 2007, as shown in the following table. The increases in premiums are primarily from sales of mortgage protection term and final expense whole life insurance products, which increased by $1.0 million and $1.2 million respectively, along with decreases in reinsurance premium expenses, during the year ended December 31, 2007.

	Year Ended December 31,
	2007		2006		2005
	(In millions)

Investors Life:
First year	$	2.4	$	0.6	$	0.1
Renewal		5.9		5.3		4.9
Total net earned premiums	$	8.3	$	5.9	$	5.0

In accordance with GAAP, deposits received in connection with annuity contracts and premiums received for universal life (“UL”) insurance policies are reflected in the consolidated financial statements as increases in liabilities for contractholder deposit funds and not as revenues. Annual charges made against these deposits are reported as revenue. For the years 2005 through 2007, the table below reflects the amounts of such annuity deposits and UL premiums.

	Year Ended December 31,
	2007		2006		2005
Annuity deposits and UL premiums:	(In millions)

Annuity deposits	$	0.8	$	1.2	$	1.3
UL premiums		22.3		26.4		28.6
Total annuity deposits and UL premiums	$	23.1	$	27.6	$	29.9

The declines in UL premiums and annuity deposits in 2007, 2006 and 2005, shown in the above table, reflect the net run-off of business from the Company’s existing book of business, and declining sales of new UL policies. Management has de-emphasized the sale of annuity and UL products since 2004 due primarily to the interest-rate environment and certain design features of FIC’s current annuity products. Most of the Company’s marketing efforts focused on the sale of traditional life insurance products, such as mortgage protection term insurance and final expense whole life insurance. Liabilities for contractholder deposit funds have declined from $511.4 million at December 31, 2004 to $424.9 million at December 31, 2007.

Earned insurance charges totaled $30.4 million, $31.7 million, and $32.8 million for the years ended December 31, 2007, 2006, and 2005, respectively. These revenues primarily consist of UL cost of insurance charges, but also include policy surrender charges, and policy administration charges. The decline in earned insurance charges is primarily due to reduced UL cost of insurance charges resulting from the net run-off of business.

Net investment income for the year ended December 31, 2007, was $31.0 million as compared to $29.3 million for the year ended December 31, 2006, and $25.8 million for the year ended December 31, 2005. The higher net investment income in 2007 versus 2006 was primarily due to increased dividend income earned on the Company’s investments in equity securities totaling $746,000 and improved investment yields. Dividend income earned on the equity securities totaled $941,000 for 2007 compared to $195,000 for 2006. The increase in net investment income from 2005 to 2006 of $3.5 million was primarily attributable to the reinvestment of cash and short-term investments and real estate sales proceeds into higher-yielding fixed maturity investments during the latter part of 2005 and 2006 consistent with the revised investment policies of the Company. The Company sold its investment in the River Place Corporate Park office complex in June 2005 for $103 million in cash. These proceeds were initially invested in short-term investments and subsequently reinvested into longer term fixed maturity securities resulting in increased net investment income versus real estate income. The increase in market interest rates has also had a positive impact on investment yields.

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

	Year Ended December 31,
	2007			2006			2005
	(In thousands)

Fixed maturities	$	27,026		$	27,453		$	23,340
Other, including short-term investments and policy loans		4,490			2,390			3,065
Gross investment income		31,516			29,843			26,405
Investment expenses		(511	)		(522	)		(564	)

Net investment income	$	31,005		$	29,321		$	25,841

Real estate revenue was primarily earned from the leases on the buildings at the Company’s River Place Corporate Park office complex in Austin, Texas. Net real estate income (revenues from leases less associated operating expenses and depreciation) totaled $0.6 million for the year ended December 31, 2005. The Company sold its River Place Corporate Park office complex in June, 2005, and the remaining real estate properties held for sale were sold in January 2006. Accordingly, the Company no longer had real estate income in 2007 nor 2006.

For the year ended December 31, 2006, FIC had $517,000 net realized gains on real estate sales, compared to $9.2 million net realized gains in 2005. The realized gains on real estate for 2005 includes $8.5 million in gains recognized on the sale of the River Place Corporate Park property and $761,000 of gains recognized on the sale of three properties included in real estate held for sale. The Company’s remaining three properties were sold in January 2006.

For the year ended December 31, 2007, FIC had $78,000 net realized gains on fixed maturities and other investments, compared to net realized losses of $11,000 in 2006 and $631,000 in 2005. In the third quarter of 2005, a bond was classified as temporarily impaired, resulting in a writedown of $1 million. This bond was called in the fourth quarter of 2005. Various other bonds were called or sold by the Company throughout 2005 for net gains that largely offset the previously described write-down.

Other revenues totaled $7.1 million, $4.9 million and $2.7 million for the years ended December 31, 2007, 2006 and 2005, respectively. The significant increases during 2007 are partially due to the recognition of deferred revenue related to the Company’s coinsurance agreement with Family Life of $1.3 million and fees earned for services performed under an administrative services agreement with Family Life. The significant increase in other revenues in 2006 is primarily related to fees earned related to the Company’s separate accounts. As previously described, effective June 1, 2006, Investors Life recaptured the previously reinsured investment annuity business with Symetra Life resulting in the retention of 100% of this business. The recapture of this previously reinsured separate accounts business increased other revenues in 2006 by approximately $1.3 million as compared with 2005. Additionally, other revenues in 2006 included approximately $0.6 million in interest income received from the IRS on tax refunds related to prior years’ amended returns.

Other revenues also increased in 2007 due to fees earned for services performed under an administrative services agreement with Family Life. As previously described, Family Life entered into an administrative services agreement with the Company for a three month period following the sale of Family Life. Pursuant to the agreement, the Company provided administrative services for Family Life through March 31, 2007, at which time Manhattan Life assumed all responsibilities for administering the Family Life business. The Company earned fees totaling $807,000 in the first quarter of 2007 for services performed for Family Life in accordance with the agreement.

Other revenues for 2007 were also impacted by the recognition of $1.3 million of deferred revenue related to the Company’s coinsurance agreement with Family Life. As described in more detail in Note 2 of the accompanying consolidated financial statements, in connection with the sale of Family Life, Investors Life entered into a coinsurance agreement with Family Life pursuant to which it will cede to Family Life (a wholly-owned subsidiary of Manhattan Life) 35% of the face amount of mortgage protection term policies written by the Family Sales Division during the five-year period beginning April 1, 2007 and ending March 31, 2012. Such business will be administered by Investors Life, and Investors Life will receive allowances for its expenses on the portion of the business that is ceded. Accordingly, the Company accrued a deferred revenue liability of $1.4 million in conjunction with recording the sale of Family Life, equal to the estimated net present value of future profits expected to be ceded to Manhattan Life. The $1.4 million liability reflected the estimated portion of the $28 million sales price of Family Life that was paid by Manhattan Life for the value of the coinsurance agreement.

Effective with the beginning of the fourth quarter of 2007, the Company made the decision to cease sales of mortgage protection term products. A resulting impact of this decision is the accounting implications for the previously described deferred revenue liability. As the Company will no longer sell any mortgage term products subject to the coinsurance agreement, the Company recognized in income $1.3 million of the deferred revenue liability in the year ended December 31, 2007. The remaining $100,000 of the original liability balance relates to policies sold and recorded in the period from April 1, 2007 through September 30, 2007 which were subject to the coinsurance agreement. This amount will be amortized to income in future periods over the lives of these policies. Amortization of this remaining liability totaling $7,500 has been recognized through December 31, 2007.

Benefits and Expenses

Policyholder benefits and expenses, which consist primarily of death benefit claims, totaled $30.8 million, $26.7 million, and $29.9 million for the years ended December 31, 2007, 2006, and 2005, respectively. The increases and decreases noted during each of these years are primarily attributable to changes in death benefits. Additionally, in 2007, the increase in traditional premium revenues for 2007 also caused a corresponding increase in traditional policy reserve expenses.

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 $17.2 million in 2007, $18.0 million in 2006, and $18.4 million in 2005. The decreases in interest expense noted during these years reflect the net run-off of business from the Company’s existing book of business, and, consequently, the decline in 2007 is primarily attributable to this overall reduction in the level of contractholder deposit funds. Liabilities for contractholder deposit funds have declined from $511.4 million at December 31, 2004 to $424.9 million at December 31, 2007.

The level of market interest rates can affect 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 lower market rates in 2004 and 2005 by lowering many of the credited rates on its policies in these periods. 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 prior periods put pressure on the Company’s interest spread. Market rate increases in 2005 and 2006 have improved the Company’s interest spread.

Amortization of deferred policy acquisition costs (“DAC”) totaled $2.1 million, $1.2 million, and $1.6 million for the years ended December 31, 2007, 2006, and 2005, respectively. These expenses represent the amortization of the costs of producing new business, which consist primarily of agents’ commissions and certain policy issuance and underwriting costs. DAC is amortized over the premium-paying period of the policies in proportion to estimated annual premium revenue for 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. Lower policy lapses and surrenders for certain blocks of traditional life business resulted in the reduced amortization for 2006. The increase in amortization in 2007 is primarily due to the increased sales of traditional business by Investors Life since the third quarter of 2006 and the amortization relating to the DAC capitalized on these sales.

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 $988,000, $902,000, and $1.1 million for the years ended December 31, 2007, 2006, and 2005, respectively. The amortization is consistent with the run-off of the acquired blocks of business.

Operating expenses for 2007 were $20.4 million, as compared to $20.6 million in 2006 and $21.8 million in 2005. The Company has implemented cost reduction measures every year since 2004, and this continues to be a critical focus for the Company. However, audit, actuarial, accounting and other consulting, and legal fees continue to represent a significant component of operating expenses as the Company completed its delinquent SEC filings with the filing of Form 10-Q for the period ended March 31, 2007. As indicated in the table below, these fees totaled approximately $6.5 million, $6.6 million, and $5.6 million for 2007, 2006, and 2005, respectively.

	Year Ended December 31,
	2007		2006		2005
	(In thousands)

Audit fees	$	3,276	$	3,442	$	2,417
Actuarial fees		649		988		1,092
Accounting and other consulting fees		1,416		1,030		450
Legal fees		1,160		1,095		1,637
Total	$	6,501	$	6,555	$	5,596

As the Company is now current with its SEC filing requirements, significant reductions are anticipated going forward in these audit, actuarial, accounting and consulting expenses. The Company has, in fact, already experienced significant reductions in these fees in the second half of 2007. Additionally, as described in Note 11 of the accompanying consolidated financial statements, the Company recognized compensation expense of $363,000 for the year ended December 31, 2007 related to the requisite service period necessary for its stock options. This compensation expense is new in 2007 as stock option plans for employees and directors were approved by the shareholders in June 2007.

Interest expense for 2007, 2006 and 2005 totaled $1.4 million, $1.4 million and $1.1 million, respectively. As previously disclosed in this Item 7, the interest expense relates to debt service on the $15 million trust preferred notes (the “2003 Notes”). The 2003 Notes bear interest quarterly at the three-month LIBOR rate plus 4.2%. Interest expense for 2007, 2006 and 2005 reflects an average annual interest rate of approximately 9.5%, 9.4% and 7.6%, respectively. The higher interest expense in 2007 and 2006 is a direct result of the increase in the LIBOR rate.

Income Taxes

The provision for federal income taxes on income from continuing operations reflects income tax expense totaling $0.4 million, $2.9 million and $0.6 million for the years 2007, 2006 and 2005, respectively. These tax amounts equate to effective tax expense rates of 9.7%, 80.3%, and 39.7% for the years ended December 31, 2007, 2006, and 2005, respectively. The primary reason for the significant deviation from the expected statutory tax rate of 34% for the Company for the year 2007 is due to a decrease in the Company’s valuation allowance for deferred tax assets. The decrease in the valuation allowance is primarily a result of an increase in life insurance company deferred tax liabilities that have the ability to offset non-life insurance company deferred tax assets. In addition, the valuation allowance decreased due to the expiration of a tax attribute carryfoward in 2007 against which the Company previously maintained a valuation allowance. The primary reason for the significant deviation from the expected statutory tax rate of 34% for the Company for the year 2006 is due to an increase in the Company’s valuation allowance for deferred taxes resulting from the sale of Family Life. The sale of Family Life removed the source of income supporting certain deferred tax assets at the FIC consolidated level. The primary reason for the significant deviation from the expected statutory tax rate of 34% for the Company for the year 2005 is due to an increase in the Company’s valuation allowance for deferred tax assets. Under SFAS No. 109, the Company has established a valuation allowance when, based on the weight of the available evidence, it is more likely than not that some portion of its deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon the Company’s generation of sufficient taxable income in the future to recover tax benefits that cannot be recovered from taxes paid in prior periods. The Company’s deferred tax assets are primarily comprised of net operating losses and pension liabilities of FIC and its non-life insurance wholly owned subsidiaries and unrealized losses and policy reserves of its life insurance subsidiary. These non-life net operating loss carry forwards totaled approximately $35.3 million at year-end 2007 and begin to expire in 2008 through 2027. The valuation allowance totaled $12.1 million at December 31, 2007. Additions and (reductions) to the allowance totaled $(0.2) million, $2.1 million and $0.4 million in 2007, 2006 and 2005, respectively. The decrease in the valuation allowance in 2007 is composed of a $931,000 increase related to the adoption of FIN 48 at January 1, 2007, offset by a $1.2 million decrease during 2007. Of the $1.2 million decrease during 2007, the amount of the decrease allocated to continuing operations and other comprehensive income is $1.1 million and $0.1 million, respectively. The additions (reductions) in 2006 include $2.0 million related to continuing operations, $0.5 million related to discontinued operations, and $(0.4) million related to other comprehensive income. The additions in 2005 include $0.1 million related to continuing operations and $0.3 million related to other comprehensive income.

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, 2007, consisted of its ownership interests in its insurance subsidiary, Investors Life. 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 Investors Life.

As of December 31, 2005, Investors Life held $15.4 million of notes receivable from FIC that represented the remaining indebtedness related to the Family Life acquisition. Although this intercompany indebtedness was eliminated on FIC’s consolidated balance sheets, it created a debt service requirement at the holding company level. These notes were paid off by FIC on December 29, 2006 using proceeds from the sale of Family Life.

At the holding company level, FIC’s principal current ongoing liquidity demands relate to 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 an average rate of approximately 9.5% for 2007). The principal amount of the 2003 Notes must be repaid in a single payment in 2033.

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

The ability of 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 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.

In June 2004, FIC, with the approval of TDI, created FIC Insurance Services, L.P., a service company subsidiary, and transferred to it many of the administrative functions of the insurance companies. The service company charges Investors Life 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. Profits earned by the service company have decreased in 2007, as fees have declined due to the sale of Family Life on December 29, 2006. This agreement with the service company was terminated by Family Life upon the sale of Family Life to The Manhattan Life Insurance Company. Additionally, the Company amended the service agreement in October 2007 at the request of TDI. Under the revised terms of the agreement, the fees charged to Investors Life are limited to actual costs incurred. This will effectively negate the ability to generate future profits, except from non-related external sources, which will limit future dividend capabilities of the service company.

Liquidity considerations at Investors Life are different in nature than for the holding company. Sources of cash for Investors Life 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 withdrawals. Deposit fund liabilities for universal life and annuity products as of December 31, 2007, were $424.9 million, compared to $453.7 million at December 31, 2006. 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, 2007, the bulk of the liabilities for contractholder deposit funds on FIC’s balance sheet, $321.8 million, represented insurance products, as compared to only $103.1 million of annuity product liabilities.

Since Investors Life holds a large portfolio 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, Investors Life 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 Investors Life 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 Investors Life.

Off-Balance Sheet Arrangements and Contractual Obligations

It is not Company practice to enter into off-balance sheet arrangements nor is it Company policy to issue guarantees to third parties, other than in the normal course of issuing insurance contracts. Accordingly, the Company currently does not have any off-balance sheet arrangements. Commitments related to insurance products sold are reflected as policy liabilities and contractholder deposit funds using reserving methodologies described in Note 1 in the accompanying consolidated financial statements. Insurance contracts guarantee certain performances by the Company.

The following table summarizes information regarding FIC’s contractual obligations, including principal and interest where applicable, as of December 31, 2007. The amounts in the table are different than those reported in our consolidated balance sheet as of December 31, 2007 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.

Contractual Obligations	Total		Less than one year		One to three years		Four to five years		More than five years
	(In millions)
Long-term debt obligations (1)	$	50.0	$	1.4	$	2.8	$	2.8	$	43.0
Operating lease obligations		3.6		2.6		1.0		-		-

Other long-term liabilities reflected on the consolidated balance sheet:
Policy liabilities (2)		1,583.4		87.1		165.9		156.1		1,174.3
Accrued pension benefit cost		1.1		-		-		-		1.1
Other policy claims and benefits (3)		7.3		7.3		-		-		-

Total	$	1,645.4	$	98.4	$	169.7	$	158.9	$	1,218.4

(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 for continuing operations.

	Year Ended December 31,
	2007			2006			2005
	(In millions)

Cash and cash equivalents at beginning of year	$	55.6		$	36.9		$	24.9

Net cash provided by (used in) operating activities		(9.4	)		24.9			(3.3	)
Net cash provided by investing activities		37.4			20.2			48.0
Net cash used in financing activities		(34.2	)		(26.4	)		(32.7	)
Net increase (decrease) in cash		(6.2	)		18.7			12.0

Cash and cash equivalents at end of year	$	49.4		$	55.6		$	36.9

The increase of $18.7 million in cash and cash equivalents during 2006 was primarily due to cash provided by operating activities and by investing activities from the proceeds due to the sale of Family Life. The increase of $12.0 million in cash and cash equivalents during 2005 was primarily due to proceeds from the sales and maturities of invested assets, net of reinvestment of a portion of these proceeds.

For the year ended December 31, 2007, net cash used in operating activities was $9.4 million compared to net cash provided by operating activities of $24.9 million and net cash used in operating activities of $3.3 million for the years ended December 31, 2006, and 2005, respectively. The most notable change between 2007 and 2006 is a decrease in other liabilities of $14.8 million, partially offset by the Company’s net income of $3.6 million and a decrease in policy liabilities and accruals of $3.3 million. The primary changes noted between 2006 and 2005 were increases in other liabilities and deferred income taxes, and decreases in reinsurance receivables. The increase in other liabilities in 2006 is the most significant change which is primarily related to amounts due for unsettled transactions for purchased securities of $15.2 million. The settlement of these transactions in 2007 is the primary reason for the subsequent decrease in other liabilities.

Net cash provided by investing activities in 2007, 2006, and 2005 was $37.4 million, $20.2 million and $48.0 million, respectively. Net cash provided by investing activities increased during 2007 primarily due to the proceeds from the sales or maturities of fixed maturity securities, net of purchased fixed maturities. Net cash provided in 2006 is primarily related to the proceeds received upon the sale of Family Life, which due to the timing of the transaction, had not been reinvested into long-term securities as of December 31, 2006. Proceeds from the sales and maturities of fixed maturities and sales of investment real estate in 2005, combined with proceeds from short-term investments, provided substantially all of the cash from investing activities. As market interest rates began to rise during these years, the majority of the proceeds obtained were invested in longer-term fixed maturity securities during 2005 and 2006.

Net cash used in financing activities totaled $34.2 million, $26.4 million and $32.7 million in 2007, 2006 and 2005, respectively. The most significant components of the Company’s financing activities are contractholder fund deposits and withdrawals for annuity and universal life insurance policies. For 2007, 2006, and 2005, contractholder fund withdrawals exceeded deposits by $33.8 million, $28.9 million and, $32.7 million, respectively. The change in net withdrawals in 2007 is primarily related to the decline in contractholder fund deposits of $4.5 million. The change in net withdrawals in 2006 was due to a decline in deposits in 2006 from 2005 of $2.2 million and a decline in withdrawals of $6.1 million for the same period.

The significant decrease in contractholder fund deposits in 2007, 2006 and 2005 from prior years was 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. Additionally, most of the Company’s marketing efforts shifted to the sale of traditional insurance products, such as mortgage protection term and final expense products, as opposed to universal life insurance products. Total contractholder fund deposits, which include UL premiums and annuity deposits, for 2007, 2006, and 2005 were $23.1 million, $27.7 million, and $29.9 million, respectively.

Total contractholder fund withdrawals for 2007, 2006, and 2005, totaled $57.0 million, $56.5 million, and $62.6 million, respectively. Contractholder fund withdrawals are a normal part of the run-off of any company’s existing book of business.

Also included in 2006 financing activities is $2.5 million in cash provided from the sale of treasury stock. Immediately prior to the sale of Family Life to Manhattan Life, Family Life owned 324,320 shares of FIC common stock, which were reflected as treasury stock for consolidated financial statement purposes. Upon the sale of Family Life, these shares were recorded as a sale of treasury stock and are now reflected as outstanding FIC common stock shares. The $2.5 million received for the sale of these shares is an allocated portion of the total $28.0 million purchase price for Family Life.

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 funding cash used in operations with 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.

Investments

The Company’s principal investments are in fixed maturity securities which are exposed to three primary sources of investment risk: credit, interest rate and liquidity. 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 is 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.

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

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 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). When existing blocks of business are acquired, an intangible 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 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 assumptions about investment returns, product loads, mortality rates, persistency rates, and maintenance expense levels. DAC and PVFP for traditional type life products is reported under Statement of Financial Accounting Standards No. 60 (“SFAS 60”), pursuant to which DAC and PVFP is amortized over the premium paying period in proportion to the present value of estimated future gross premiums. The projection assumptions for SFAS 60 business are set at the time of policy issue. Under SFAS 60, these assumptions are “locked in” and are not revised for the lifetime of the policies, except where there is a premium deficiency. Variability in amortization after policy issuance is caused only by variability in premium volumes, except for premium deficiencies.

A premium deficiency is recognized when existing policy liabilities, together with the present value of future gross premiums, will not be sufficient (a) to cover the present value of future benefits to be paid to or on behalf of policyholders and settlement and maintenance costs relating to a block of long-duration contracts and (b) to recover unamortized deferred policy acquisition costs. A premium deficiency is recognized by a charge to income and (a) a reduction of unamortized deferred policy acquisition costs and/or (b) an increase in the liability for future policy benefits.

The Company has not recorded a premium deficiency adjustment for its SFAS 60 DAC and PVFP asset for any period in the last three years. Additionally, the Company currently does not foresee any premium deficiencies or changes to the “locked in” assumptions.

At December 31, 2007 and 2006, DAC and PVFP related to SFAS 60 products totaled $8.1 million and $5.7 million, respectively.

DAC and PVFP for universal life and annuity products is reported under Statement of Financial Accounting Standards No. 97 (“SFAS 97”), pursuant to which DAC and PVFP is amortized over the estimated lives of the contracts in proportion to actual and estimated future gross profits. Estimated future gross profit assumptions are not subject to lock-in as with SFAS 60 policies. The amount of future gross profits is dependent principally upon returns in excess of the amounts credited to policyholders, mortality, persistency, interest crediting rates, and expenses to administer the business. Each reporting period, the Company updates the estimated gross profits with the actual gross profits for that period. When the actual gross profits exceed the previously estimated gross profits, DAC and PVFP amortization will increase, resulting in a current period charge to earnings. The opposite result occurs when the actual gross profits are below the previously estimated gross profits. Each reporting period, the Company also updates the actual amount of business remaining in-force, which impacts expected future gross profits.

The Company also periodically reviews long-term assumptions underlying the projections of estimated gross margins and profits. These include investment returns, interest crediting rates, mortality, persistency, and expenses to administer the business. Management annually updates assumptions used in the calculation of estimated gross margins and profits which may have significantly changed. If the update of assumptions causes expected future gross margins and profits to increase, DAC and PVFP amortization will decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update causes expected future gross margins and profits to decrease.

Over the past three years, the Company’s primary assumption changes have been due to revisions for investment returns. Due to the rather mature nature of the Company’s existing SFAS 97 blocks of business, the Company expects the investment return assumption to be the one that is most like to cause significant changes in the future. The Company is almost exclusively selling SFAS 60 type products with very little sales of SFAS 97 products. The SFAS 97 products sold in the past, which are universal life insurance and annuities, represent virtually closed, mature blocks of business. Historically, the Company has not had assumption changes of the magnitude that results in significant DAC and PVFP amortization adjustments for SFAS 97 related contracts.

The following table reflects the effect on DAC and PVFP of changing each of the respective assumptions during the years ended December 31, 2007 and 2006. These changes were recorded as additional expense in the Company’s consolidated statement of operations.

	2007		2006

Investment return	$	-	$	183,000
Expense		-		-
In-force/persistency		-		-
Other		-		-

Total	$	-	$	183,000

At December 31, 2007 and 2006, DAC and PVFP related to SFAS 97 products totaled $13.7 million and $16.5 million, respectively.

Policy Liabilities

Policy liabilities include contractholder deposit funds and liabilities for future policy benefits. Contractholder deposit funds represent liabilities for universal life and annuity products that totaled $424.9 million, or 78.7% of total policy liabilities, at December 31, 2007. These liabilities consist of deposits received from customers and are accumulated at actual credited interest rates on their fund balances less charges for expenses and mortality. These liabilities are not based on assumptions or judgment but are based on a calculated fund balance.

Liabilities for future policy benefits relate to traditional life insurance products that totaled $114.9 million, or 21.3% of total policy liabilities, at December 31, 2007. Future policy benefit liabilities are computed using the net level premium method, or an equivalent actuarial method. Assumptions used in these computations include those for investment yields, expenses, withdrawals, and mortality. The investment yield assumption varies by product duration and is based on Company experience and expectations. Expense assumptions and assumptions for withdrawals vary by product, issue age, and policy duration, and are also based on Company experience and expectations. Assumptions for mortality are based upon industry experience as modified to reflect Company experience. Additional provisions are also made to allow for possible adverse deviation from assumptions used.

Once established, assumptions for these traditional life insurance products are generally not changed for policies issued under those assumptions. In accordance with SFAS 60, original assumptions shall continue to be used in subsequent accounting periods to determine changes in the liability for future policy benefits (often referred to as the “lock-in concept”) unless a premium deficiency exists.

Actual experience is compared to assumptions periodically. For policies issued under a set of assumptions, those assumptions are “locked in” and are not revised for the lifetime of the policies, except where there is a significant deviation of actual experience from original assumptions (i.e., a premium deficiency exists). Over the past three years, the Company has not had any premium deficiency issues nor does it anticipate such an issue in the foreseeable future.

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.

Other significant accounting policies, although not involving the same level of measurement uncertainties as those discussed above but nonetheless important to the understanding of the financial statements, are described in Note 1 to the accompanying consolidated financial statements.

Recent Adoption of Accounting Pronouncements

Income Taxes

Effective January 1, 2007, the Company adopted FIN 48 which clarifies the accounting for uncertainty in tax positions. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheets; and provides transition and interim period guidance, among other provisions. FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. As a result of the implementation of FIN 48, the Company recognized a $1,441,000 increase in the liability for unrecognized tax benefits and a $255,000 increase in deferred tax assets, net of valuation allowance, resulting in a $1,186,000 reduction to the January 1, 2007 balance of retained earnings. The Company also reclassified, at adoption, $3,522,000 of current tax liabilities (previously recorded as a reduction to current tax receivables) and $503,000 of deferred tax liabilities to the liability for unrecognized tax benefits included within other liabilities.

Insurance Contracts

Effective January 1, 2007, the Company adopted American Institute of Certified Public Accountants (“AICPA”) Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred policy acquisition costs (“DAC”) on internal replacements of insurance and investment contracts other than those specifically described in Statement of Financial Accounting Standards (“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.” SOP 05-1 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. It is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The adoption of SOP 05-1 did not have a material impact on the Company’s consolidated financial statements.

Servicing of Financial Assets

Effective January 1, 2007, the Company adopted 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. The adoption of SFAS 156 did not have a material impact on the Company’s consolidated financial statements.

Effective January 1, 2007, the Company adopted SFAS No. 155, “Accounting for Certain Hybrid Instruments” (“SFAS No. 155”). 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) permit fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarify which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, (3) establish 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) clarify that concentrations of credit risk in the form of subordination are not embedded derivatives, and (5) amend 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. The adoption of SFAS No. 155 did not have a material impact on the Company’s consolidated financial statements.

Future Adoption of New Accounting Pronouncements

The following pronouncements have been identified as those which could be applicable to the Company’s consolidated financial statements.

In September, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a common definition for 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 will not have a material impact on the Company’s consolidated financial statements.

In February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits all entities the option to measure most financial instruments and certain other items at fair value at specified election dates and to report related unrealized gains and losses in earnings. The fair value option will generally be applied on an instrument-by-instrument basis and is generally an irrevocable election. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not plan to adopt SFAS 159.

In December, 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). Under SFAS 141R, as under SFAS No. 141, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Statement 141R will also change the accounting treatment for certain specific items, including acquisition costs, noncontrolling interests, acquired contingent liabilities, in-process research and development, restructuring costs associated with a business combination, and changes in deferred tax asset valuation allowances and income tax uncertainties. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS 141R amends SFAS 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141R would also apply the provisions of SFAS 141R. SFAS 141R is not expected to have a material impact on the Company’s consolidated financial statements as the Company is currently not anticipating any future acquisitions.

In December, 2007, the SEC staff issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 documents the views of SEC staff regarding the use of a “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with FASB Statement No. 123, “Share-Based Payment.” The guidance in this release is effective January 1, 2008. SAB 110 is not expected to have a material impact on the Company’s consolidated financial statements.

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 subsidiary, 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 Results of Operations – Financial Condition - Assets.”

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 $31.2 million at December 31, 2007, and $26.1 million at December 31, 2006. For purposes of the foregoing estimate, fixed maturity investments were taken into account. The fair value of such assets was $499.3 million at December 31, 2007, and $521.0 million at December 31, 2006.

The fixed income investments of the Company include certain mortgage-backed securities (excluding asset-backed securities). The fair value of such securities was $101.0 million at December 31, 2007 and $106.3 million at December 31, 2006. 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 $9.0 million at December 31, 2007 and $8.6 million at December 31, 2006.

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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

Reports of BDO Seidman, LLP, Independent Registered Public Accounting Firm, dated March 17, 2008.

Report of Deloitte & Touche LLP, Independent Registered Public Accounting Firm, dated May 30, 2007.

Consolidated Balance Sheets as of December 31, 2007 and 2006.

Consolidated Statements of Operations for the years ended December 31, 2007, 2006, and 2005.

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007, 2006, and 2005.

Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005.

Notes to Consolidated Financial Statements.

Consolidated Financial Statement Schedules.

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

On September 6, 2007, FIC dismissed Deloitte & Touche LLP as its independent registered public accounting firm and engaged BDO Seidman, LLP as its new independent registered public accounting firm. The Company’s Audit Committee and Board of Directors participated in and approved the decision to change its independent registered public accounting firm. During the years ended December 31, 2006 and 2005, and through September 6, 2007, there had been no disagreements with Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. BDO Seidman, LLP’s engagement commenced with the review of the unaudited consolidated financial statements of the Company for the quarter ended September 30, 2007. Further discussion of this change of independent registered public accounting firm was reported on Form 8-K which was filed on September 6, 2007.

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 Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. Our Chief Executive Officer and Chief Financial Officer supervised and participated in the evaluation. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were 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 (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility1 that a material misstatement of the company’s 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, 2007, 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 maintain effective internal control over financial reporting.

The Audit Committee of the Board of Directors engaged an independent registered public accounting firm, BDO Seidman, LLP (“BDO”), to audit the Company’s internal control over financial reporting as of December 31, 2007. BDO has completed their audit for fiscal year 2007 and has issued their opinion in the following report.

__________________________

1 As used in Auditing Standard No. 5, there is a reasonable possibility of an event, when the likelihood of the event is either “reasonably possible” or “probable.”

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Financial Industries Corporation

Austin, Texas

We have audited Financial Industries Corporation and Subsidiaries (the “Company”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). 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, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. 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 accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

In our opinion, Financial Industries Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Financial Industries Corporation and Subsidiaries as of December 31, 2007 and the related consolidated statements of operations, shareholders’ equity, and cash flows and financial statement schedules for the year ended December 31, 2007 and our report dated March 17, 2008 expressed an unqualified opinion thereon.

BDO Seidman, LLP

Dallas, Texas

March 17, 2008

Change in Internal Controls over Financial Reporting

During 2007, the Company continued its ongoing efforts to remediate internal control deficiencies, improving its internal controls over financial reporting and resolving all material weaknesses previously identified in the Company’s 2006 Form 10-K. The following are some of the major actions management has taken in 2007 to address the material weaknesses previously identified:

Control Environment:

The Company’s control environment did not sufficiently promote effective internal control over financial reporting throughout its financial management organization. As such, the Company implemented an Internal Controls Remediation Plan in order to resolve all previously identified material weaknesses by December 31, 2007. This included establishing formalized policies and procedures, process narratives, process flowcharts, and internal control matrices in departments within the core operations of the Company, i.e., claims, policyholder services, and human resources, disseminating the same to all affected parties. This enabled the Company to ensure that all documented controls were accurate and consistent with current procedures, in existence and performed as stated, and properly mapped to account-level risks with proper financial assertions.

Control Monitoring:

The Company did not have established adequate systems and processes for monitoring the Company’s internal controls over financial reporting. Nor did the Company have a sustainable process for periodically evaluating control design and operating effectiveness across the Company on an on-going basis. The Company did not have 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. As such, the Company hired a Director of Internal Audit who began work on June 12, 2007 and employed an experienced Internal Controls Coordinator effective October 15, 2007. The Internal Controls Coordinator is responsible for independently monitoring and testing the Company’s internal controls.

Financial Close and Reporting:

The Company’s processes for preparing the consolidated financial statement were not clearly defined and lacked the appropriate controls to ensure the completeness, accuracy, timeliness, appropriate valuation, and proper presentation and disclosure of financial transactions. The Company engaged internal resources and a consultant to document and reengineer the financial close process and design the overall internal control structure. This design established an enhanced closing schedule, critical task checklists, closing schedule checklists, and disclosure control processes. These enhancements included the re-engineering of many operating and closing procedures to ensure that all financial closing and reporting events occur in a manner that leads to timely financial statement filings.

Reinsurance:

The Company did not maintain effective controls to ensure that reinsurance premiums were computed with the terms of the reinsurance agreement, properly approved for payment and/or recorded in the proper period. As such, the Company established additional controls to ensure accurate computation of reinsurance premiums. This includes a scheduled monthly sampling of random policies for testing to ensure reinsurance premiums are calculated properly. All reinsurance payment documents are prepared by the reinsurance processor, then reviewed and approved by the Vice-President of New Business.

Policy Holder Services:

The Company did not have appropriate controls to ensure that supplemental contracts were accurately recorded in the general ledger. As such, the Company instituted controls to enhance the accuracy of the supplemental contract payments. Management verifies changes to the supplemental contract payments master file before and after monthly disbursements for accuracy and proper authorizations.

Accounts Payable and Expenditures:

The Company did not have appropriate controls in place to adequately control purchases and payments for goods and services of the Company. As such, the Company instituted security changes in its general ledger system in order to properly segregate duties associated with accounts payable and vendor maintenance functions, including an upgrade of the Company’s general ledger system. In addition, the Company acquired an accounts payable software package during the fourth quarter 2007 to further ensure that purchase orders and payments to vendors are properly authorized and recorded.

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors of the Registrant

The members of the Board of Directors of FIC are as follows:

John D. Barnett, 65, has been a director of FIC since July 1991. He has served on several committees of the Board, including the Audit Committee. He currently serves on the Investment Committee and the Nominations/Governance Committee. 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.

Patrick E. Falconio, 67, has been a director of FIC since August 2003. He serves on the Executive Committee, the Compensation Committee and is the Chairman of the Investment Committee. 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 bachelors degree from Duquesne University and an MBA from the University of Georgia.

Richard H. Gudeman, 69, 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 bachelors degree from Illinois State University and a masters degree from Northeastern University.

R. Keith Long, 60, has been Chairman of the Board of FIC since August 22, 2003. He serves on the Executive Committee, the Nominations/Governance Committee and the Investment 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, 68, has been a director of FIC since November 1, 2005. He serves on the Audit Committee, the Investment Committee and the Marketing Committee of the Board of Directors. 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 has a bachelors degree from Bradley University and a masters degree from the University of Illinois.

Lonnie Steffen, 58, 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 Homestead Risk Management since 2007. From 1997 through 2007, he served as president and chief financial officer of Dearborn Risk Management. 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 bachelors degree from Northern Illinois University.

Kenneth S. Shifrin, 58, has served as a director of FIC since June 10, 2003. He serves on the Executive Committee, the Audit 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 and CEO of American Physicians Service Group, Inc., a management and financial services firm that provides medical malpractice insurance for doctors and brokerage and investment services to institutions and high net worth individuals. He has served as CEO since 1989 and served as its President from 1989 to April 2007. 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. 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.

Eugene J. Woznicki, 66, has been a Director of FIC since June 10, 2003. He serves on the Marketing Committee and chairs the Compensation 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. In October 2005, Mr. Woznicki was elected to the board of directors of Penn Treaty America Corporation, serving as chairman since October 19, 2007. 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.

Executive Officers of the Registrant

The executive officers and other significant employees of FIC as of February 29, 2008 are as follows:

Name	Position	Age
William B. Prouty	Chief Executive Officer	62
Michael P. Hydanus	Executive Vice President and Chief Operations Officer	56
Vincent L. Kasch	Chief Financial Officer	46

Mr. Prouty joined FIC in February 2007 as Chief Executive Officer, replacing Michael P. Hydanus, who had served as Interim President and Chief Executive Officer of the Company since November 2005. Mr. Prouty is a partner at DLB Capital, LLC, a private equity and financial services advisory firm and has over 35 years experience in the insurance industry. From January 2005 to September 2006, Mr. Prouty worked as a consultant assisting a variety of private equity and industry clients. From February 2003 to December 2004, Mr. Prouty served as the Executive Vice President, Insurance Operations at the Conseco Insurance Group and then was Chief Operating Officer of Bankers Life & Casualty, Conseco’s largest autonomous subsidiary. From June 2000 to February 2003, Mr. Prouty was Chief Executive Officer of Campus Technology Solutions, a public-private joint venture between the University of Louisville and Novell, Inc. In 1998, Mr. Prouty joined Novalis Corporation where he was Chief Operating Officer until the sale of the company in 2000. From 1993 to 1998 he was with Harvard Pilgrim Health Care, most recently as Senior Vice President of Customer Service. From 1986 to 1993, Mr. Prouty was a Partner with Ernst & Young. He has a B.S. in Corporate Finance from Miami University, Oxford, Ohio.

Mr. Hydanus joined FIC in May, 2005 as Senior Vice President-Operations. Mr. Hydanus served as the Interim President and Chief Executive Officer of FIC from November 5, 2005 until Mr. Prouty’s appointment as Chief Executive Officer on February 1, 2007, at which time Mr. Hydanus was named Executive Vice President and Chief Operations Officer of the Company. 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 President, Sage Consulting Group, LLC a management consulting organization specializing in the areas of corporate operations and information technology effectiveness. His consulting practice included many well known national clients including the largest health benefit organization in the U.S., an industry leading insurance policy administration systems vendor and a technology services provider. He was Chief Operating Officer and Chief Information Officer of Security First Group (a MetLife Company) from 2000 to 2001. Prior to that, he served 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. From 1980 to 1995 Mr. Hydanus held several senior management positions with the National Guardian Life Insurance Group in Madison, WI. In his early career Hydanus held management and technical positions in the electric utility, savings and loan and food distribution industries. Mr. Hydanus received a B.A. in Business Administration from Lakeland College. He is a Fellow in the Life Management Institute and is in the process of earning his Chartered Life Underwriter and Chartered Financial Consultant certifications.

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.

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, 2007, through December 31, 2007, 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.

Code of Ethics

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 both the Code and 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.

Director Nominations

In assessing the qualifications of candidates for director, the Nominating/Governance Committee considers, in addition to qualifications set forth in the Company’s bylaws, each potential nominee’s personal and professional integrity, experience, reputation, skills, ability and willingness to devote the time and effort necessary to be an effective board member, and commitment to acting in the best interests of the Company and its shareholders. Also the Committee considers whether or not a candidate may have professional or personal experience relevant to the Company’s business and industry. The Committee also considers requirements under the listing standards of the Nasdaq Stock Market, Inc. for a majority of independent directors, as well as qualifications applicable to membership on Board committees under the listing standards and various regulations. The Committee makes recommendations to the Board, which in turn makes the nominations for consideration by the shareholders.

The Nominating/Governance Committee considers candidates for nomination to the Board of Directors from a number of sources. Current members of the Board of Directors are considered for re-election unless they have notified the Company that they do not wish to stand for re-election. The Nominating/Governance Committee also considers candidates recommended by current members of the Board of Directors, members of management or eligible shareholders. From time to time, the Board may engage a firm to assist it in identifying potential candidates, although the Company did not engage a firm to identify any of the nominees for director to be elected at the 2006 Annual Meeting. The extent to which the Nominating/Governance Committee dedicates time and resources to the consideration and evaluation of any potential nominee brought to its attention depends on the information available to the Committee about the qualifications and suitability of the individual, viewed in light of the needs of the Board, and is at the Committee’s discretion. Recognizing the contribution of incumbent directors who have been able to develop, over a period of time, increasing insight into the Company and its operations and, therefore, provide an increasing contribution to the Board as a whole, the Nominating/Governance Committee reviews each incumbent director’s qualifications to continue on the Board in connection with the selection of nominees to take office when that director’s term expires, and conducts a more detailed review of each director’s suitability to continue on the Board following expirations of the director’s term.

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 independent 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 Robert A. Nikels.

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.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview

Financial Industries Corporation (for purposes of this Compensation Discussion and Analysis, the ”Company”) is a holding company engaged primarily in the life insurance business through its ownership of Investors Life. At December 31, 2007, the Company (including its subsidiaries) had 88 employees, all of whom worked in the Company’s home office operations. Financial Industries Corporation’s executive officers are the members of its management group. The Board of Directors has determined that the members of the management group are the only persons, other than directors, who have the authority to participate in major policy-making functions of the company and its direct and indirect subsidiaries. As of December 31, 2007, Financial Industries Corporation had three executive officers (“Executives”).

The Compensation Committee of the Board of Directors has the responsibility 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. Eugene J. Woznicki, chairman, has served on the Compensation Committee since August 2003. Richard H. Gudeman has served since March 2004, and Patrick E. Falconio has served since January 2007.

Objectives of Compensation Program

The primary objective of our compensation program is to provide a total compensation package for Executives in a way that reinforces decisions and actions which will drive long-term sustainable growth, which in turn leads to increased shareholder value.

What Our Compensation Program is Designed to Reward

The Compensation Committee focuses on the goals of the business and designs rewards programs that recognize business achievements it believes are likely to promote sustainable growth. The Compensation Committee believes compensation programs should reward Executives who take actions that are best for the long-term performance of the Company while delivering positive annual operating results.

The Compensation Committee combines this approach with an integrated performance management process that includes strategies, business planning, and individual performance in order to closely link executive compensation to the interests of shareholders. The Compensation Committee also takes into consideration external market practices.

Regarding most compensation matters, including executive compensation, our management provides recommendations to the Compensation Committee; however, the Compensation Committee does not delegate any of its functions to others in setting compensation. The compensation of the Chief Executive Officer, however, is determined by the Board of Directors. We do not currently engage any consultant related to executive compensation matters.

Elements of Our Compensation Plan and How It Relates to Our Objectives

Currently the Compensation Committee uses short-term compensation (salary and incentive bonus payment) and long-term compensation (stock based plan awards such as restricted stock awards or stock options) to achieve its goal of driving sustainable growth. The Compensation Committee uses its judgment and experience in determining the mix of compensation. The Compensation Committee also informs itself of market practices and uses market data for context and a frame of reference for decision making. Base salary and incentive bonus payments are determined and paid annually and are designed to reward current performance. Equity incentive plan awards such as restricted stock awards are designed to reward longer term performance. The Compensation Committee reviews total short-term and long-term compensation annually. In allocating among these categories, the Compensation Committee currently believes that the Executives should receive a greater portion of their compensation in base salary.

During 2007, the Company employed three executive officers, William B. Prouty as Chief Executive Officer, Michael P. Hydanus as Executive Vice President and Chief Operations Officer, and Vincent L. Kasch as Chief Financial Officer. Possible compensation for these individuals included short-term compensation in the form of a base salary and potential annual incentive award and long-term compensation in the form of stock-based compensation under the FIC Incentive Stock Plan which is subject to shareholder approval.

Short-Term Compensation

Salaries. A base salary is important in attracting exceptional Executives and provides a secure base of cash compensation. Increases are not preset and the Committee reviews corporate goals and objectives relevant to the compensation of the Executives, evaluates the performance of him or her in light of those goals and objectives, and recommends to the Board the compensation levels based on such evaluations.

Base salaries of the Executives 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. The annual incentive bonus payments are paid in cash. Actual awards are based on individual performance. Individual performance is determined based on performance of the individual in light of his or her preset objectives. The Compensation Committee may also take into account additional considerations that it deems fundamental. Depending on the Executives’ responsibilities, performance is set and measured at the corporate level or a combination of corporate or operating level, as appropriate.

Using these guidelines, the Compensation Committee reviewed our fiscal 2007 results and evaluated the performance of each of our Executives. Based on such evaluations, the Compensation Committee determined the annual incentive bonus payment for each. For the years 2007, 2006 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.

Long-Term Compensation

The long-term incentive compensation that the Compensation Committee generally employs is the granting of stock options and restricted stock awards. The purpose of granting such awards is to provide a significant potential value that reinforces the importance of creating value for the shareholders of the Company.

The long-term incentive compensation is intended to motivate executives to make stronger business decisions, improve financial performance, focus on both short-term and long-term objectives and encourage behavior that protects and enhances the interests of our shareholders. In 2005, the Committee recommended stock options for each of the executives who were employed during that period. The Committee also, at its discretion, may recommend the award of shares of restricted stock.

Incentive Stock Plan. On May 4, 2004, the Board adopted the FIC Incentive Stock Plan. This plan was subsequently approved by the shareholders of FIC on June 29, 2007. The plan provides for the award of incentive stock options, non-qualified stock options, or restricted stock to Key Employees.

The FIC Incentive Stock Plan is intended to align the interests of our employees with the interests of our shareholders. The FIC Incentive Stock Plan is designed to increase employees’ proprietary interests in the Company and provide incentives directly linked to increases in shareholder value. The FIC Incentive Stock Plan is also intended to strengthen our ability to attract and retain talented employees.

Key Employees of FIC or any designated subsidiary are eligible to be considered for awards under the FIC Incentive Stock Plan. The Plan defines Key Employees as those whose responsibilities and decisions, in the judgment of the Compensation Committee, directly affect the performance of the Company and its subsidiaries. The Compensation Committee will, from time to time, make recommendations to the Board as to persons eligible to participate in the FIC Stock Incentive Plan. The Board will consider the recommendations of the Compensation Committee and determine the terms and conditions of any benefits granted under the FIC Incentive Stock Plan to participants.

The FIC Incentive Stock Plan will be administered by the Compensation Committee or such other committee as determined by the Board of Directors. The Committee has authority to interpret the FIC Incentive Stock Plan, to adopt rules and regulations in order to carry out the terms of the FIC Incentive Stock Plan and to make determinations in connection with the FIC Incentive Stock Plan and benefits as it may deem necessary or advisable.

The FIC Incentive Stock Plan provides for the granting to Key Employees of incentive stock options, which are intended to comply with Section 422 of the Internal Revenue Code, and non-qualified stock options.

This plan also provides for the granting of restricted stock awards to employees. Restricted stock awards are grants of Common Stock transferred to participants subject to restrictions on the sale or other disposition of the shares before the occurrence of a specified event. The Board of Directors will determine the terms, conditions and restrictions applicable to a grant of a restricted stock award.

The Company awarded grants totaling 150,000 shares to its named executive officers and other employees under the Incentive Stock Plan during its fiscal year ended December 31, 2007. No grants were awarded during the fiscal year ended December 31, 2006.

Perquisites and Other Personal Benefits

Generally, the Company provides modest perquisites and other personal benefits, and only with respect to benefits or services that are designed to assist Executives in being productive and focused on their duties, and which management and the Compensation Committee believe are reasonable and consistent with the Company's overall compensation program. Management and the Compensation Committee periodically review the levels of perquisites or personal benefits provided to Executives. Given the importance of developing business relationships to our success, our Executives are also reimbursed for initiation fees and dues they incur for club memberships deemed necessary for business purposes. During its fiscal year ended December 31, 2007, the Company provided perquisites or other personal benefits to its chief executive officer, as disclosed in the accompanying Summary Compensation Table.

Compensation for the Executives

Annually, the Compensation Committee reviews the Executives’ performance against individual objectives such as business results versus preset business objectives, annual financial performance goals and our strategic performance initiatives. The Compensation Committee then decides on their incentive bonus payments after considering input by the full Board. During 2007, our Chief Executive Officer, William B. Prouty, and our Executive Vice President and Chief Operations Officer, Michael P. Hydanus, were parties to respective employment agreements governing the terms of their compensation.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of SEC Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for 2007. This report was adopted on March 7, 2008, by the Compensation Committee of the Board of Directors:

Eugene J. Woznicki, Chairman

Patrick E. Falconio

Richard H. Gudeman

Summary Compensation Table

The following table sets forth information, for the years ended December 31, 2007 and 2006, concerning the compensation of the Company’s chief executive officer and the other most highly compensated executive officers (the “named executive officers”) who were serving as executive officers at the end of each year, respectively.

Name and Principal Position	Year	Salary			Bonus		Stock Awards		Option Awards (6)		Non-Equity Incentive Plan Compensation (3)		Change in Pension Value and Nonqualified Deferred Compensation Earnings		All Other Compensation			Total
William B. Prouty, Chief Executive Officer	2007	$	356,923	(4)	$	100		-	$	189,840	$	-		-	$	37,932	(5)	$	584,795

Michael P. Hydanus, Executive	2007	$	247,524		$	25,100		-	$	25,428	$	16,698		-	$	9,000	(2)	$	323,750
Vice President and COO	2006	$	288,724	(1)	$	5,000		-	$	-	$	-		-	$	6,775	(2)	$	300,499

Vincent L. Kasch,	2007	$	189,157		$	25,100		-	$	78,429	$	14,372		-	$	9,000	(2)	$	316,058
Chief Financial Officer	2006	$	178,919	(1)	$	10,000		-	$	-	$	-		-	$	10,089	(2)	$	199,008

(1)

This amount is slightly less than the negotiated salary as a result of the payroll conversion to payments in arrears.

(2)

Represents amounts contributed under the InterContinental Life Corporation Employees Savings and Investment Plan (“401K Plan”).

(3)

Represents amounts paid under the 2007 Pay Grade 12 and above Incentive Plan.

(4)

This amount reflects 25 pay periods effective with Mr. Prouty’s date of employment, February 1, 2007.

(5)

Represents Mr. Prouty’s reimbursable expenses per his employment agreement for an apartment ($26,477), car ($9,455), and reasonable and necessary business related expenses.

(6)

Represents stock compensation expense recognized under SFAS No. 123(R). See Note 11 in the consolidated financial statements.

The following employment agreements were in effect during 2007 with respect to the individuals listed in the Summary Compensation Table:

William B. Prouty. FIC engaged Mr. Prouty pursuant to the CEO Engagement Agreement, dated February 1, 2007. Under the terms of the CEO Engagement Agreement, Mr. Prouty will serve as the Chief Executive Officer of FIC from February 1, 2007 to January 31, 2008, unless terminated earlier in accordance with the CEO Engagement Agreement. Mr. Prouty will be paid a salary of $400,000 per year and will be provided an apartment and car in Austin, Texas. Additionally, if there is a Change of Control (as defined in the CEO Engagement Agreement) and certain conditions are satisfied, Mr. Prouty would be paid $600,000. FIC and Mr. Prouty also entered into the Stock Option Agreement on February 1, 2007 pursuant to which Mr. Prouty was issued an option to purchase 150,000 shares of the common stock of FIC at a price of $7.45 per share. Fifty percent (50%) of the option vested on February 1, 2007, and the remaining fifty percent (50%) vested on June 21, 2007. The option expires on June 21, 2009. (See also Item 13 – Certain Relationships and Related Transactions – Related Party Transactions in 2007.)

FIC and William Prouty entered into Amendment No. 1, effective as of January 31, 2008 (the "Amendment") to the CEO Engagement Agreement, dated as of February 1, 2007 (the "Employment Agreement"), between FIC and Mr. Prouty. The Amendment extends the term of Mr. Prouty's employment as FIC's Chief Executive Officer through the earlier of (i) the consummation of a Change of Control Transaction (as defined in the Employment Agreement), including without limitation the consummation of the merger pursuant to the Agreement and Plan of Merger, dated January 14, 2008, between Americo Life, Inc. and FIC (the "Americo Merger Agreement"), (ii) 5:00 p.m. on the 30th day following written notice to Mr. Prouty stating FIC's intention to terminate the Employment Agreement (or such later date specified in such written notice) or (iii) 5:00 p.m. on December 31, 2008.

In addition, the Amendment extends the period during which Mr. Prouty is entitled to a $600,000 change of control payment in the event a Change of Control Transaction (as defined in the Employment Agreement) is consummated. Under the terms of the original Employment Agreement, in order for Mr. Prouty to be entitled to the change of control payment, a Change of Control Transaction satisfying certain criteria had to be consummated on or before October 31, 2008. Pursuant to the terms of the Amendment, Mr. Prouty will be entitled to the $600,000 change of control payment in the event a Change of Control Transaction satisfying certain criteria is consummated on or before December 31, 2008. The consummation of the merger pursuant to the Americo Merger Agreement will constitute a qualifying Change of Control Transaction under the Employment Agreement, which will trigger the $600,000 change of control payment to Mr. Prouty.

Except as expressly amended by Amendment No. 1, the CEO Engagement Agreement remains unmodified and continues in full force and effect.

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 initial terms of his employment with FIC (the “COO Employment Letter”). The COO Employment Letter provided that Mr. Hydanus 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 may 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 was appointed Chief Executive Officer of the Company permanently by the Board of Directors of FIC or (2) another person was appointed Chief Executive Officer of the Company by the Board of Directors of FIC, in its discretion, and Mr. Hydanus was reassigned to assume his duties as Chief Operating Officer of the Company pursuant to the COO Employment Letter. The Employment Letter amended and restated 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 continue in full force and effect. The terms of the Employment Letter were effective for the period Mr. Hydanus served as Interim Chief Executive Officer, which terminated upon the appointment of William Prouty as the Company’s Chief Executive Officer on February 1, 2007.

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.

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. Mr. Kasch was vested in 5,000 of the options on the first anniversary of his acceptance of the employment offer, and an additional 5,000 of the options on each of the following three such anniversaries. The options will vest immediately in the event of an acquisition of more than 50% of the Company’s stock by a single shareholder (or affiliated shareholders) or a change in the majority of the members of the Company’s Board of Directors within a six-month period. The option grant is subject to the approval of the shareholders of FIC.

On September 7, 2006, Mr. Kasch received a letter from FIC which set forth the parties’ agreement with respect to a possible future Change of Control of the Company (as defined in such letter). 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.

Grants of Plan-Based Awards in 2007

The following table sets forth information concerning grants of Plan-Based Awards of the named executive officers during the year ended December 31, 2007.

Name	Grant Date	Estimated Future Payouts Under Non-Equity Incentive Plan Awards						Estimated Future Payouts Under Equity Incentive Plan Awards						All Other Stock Awards: Number of Shares of Stock or Units (#)		All Other Option Awards: Number of Securities Underlying Options (#)		Exercise or Base Price of Option Awards ($/sh)		Grant Date Fair Value of Stock and Option Awards
		Threshold ($)		Target ($)		Maximum ($)		Threshold (#)		Target (#)		Maximum (#)
William B. Prouty (3)	1-Feb	$	-	$	-	$	-		-		-		-		-		150,000	$	7.45	$	189,840
Michael P. Hydanus	14-Nov	$	-	$	-	$	-		-		-		-		-		5,000	$	5.50	$	8,691
Michael P. Hydanus (2)	2-Jul	$	-	$	-	$	-		-		-		-		-		15,000	$	6.00	$	28,561
Vincent L. Kasch	14-Nov	$	-	$	-	$	-		-		-		-		-		5,000	$	5.50	$	8,691
Vincent L. Kasch (1)	2-Jul	$	-	$	-	$	-		-		-		-		-		20,000	$	13.25	$	84,136

(1)

Represents 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. This approval was given June 29, 2007 and the grants made. Mr. Kasch was vested in 5,000 of the options on the first anniversary of his acceptance of the employment offer, and an additional 5,000 of the options on each of the following three such anniversaries. The options will vest immediately in the event of an acquisition of more than 50% of the Company’s stock by a single shareholder (or affiliated shareholders) or a change in the majority of the members of the Company’s Board of Directors within a six-month period.

(2)

In connection with the election of Mr. Hydanus as Senior Vice President – Operations of FIC in May 2005, the Board of Directors agreed to grant Mr. Hydanus an option to purchase 15,000 shares of FIC’s common stock upon the approval of the Incentive Stock Plan by the shareholders of FIC. The exercise price of such options will be equal to the fair market value of FIC’s common stock on the date of such grant, and one-third of the options will be deemed vested on each of the first three anniversaries of Mr. Hydanus’ acceptance of the employment offer. Subject to shareholder approval of the Incentive Stock Plan, the options will vest immediately upon a Change of Control (as defined in Mr. Hydanus’ COO Employment Letter). The Incentive Stock Plan was approved by the shareholders on June 29, 2007 and the options were awarded to Mr. Hydanus. In previous public filings made by the Company, it was incorrectly disclosed that Mr. Hydanus received a grant, in May 2005, of an option to purchase 15,000 shares of FIC’s common stock at a per share exercise price of $8.50.

(3)

Represents stock options awarded pursuant to Mr. Prouty’s Employment Agreement and Executive Stock Option Plan.

Outstanding Equity Awards at Fiscal Year-End 2007

The following table sets forth information concerning outstanding equity awards of the named executive officers as of December 31, 2007.

	Option Awards									Stock Awards
Name	Number of Securities Underlying Unexercised Options - Exercisable		Number of Securities Underlying Unexercised Options - Unexercisable		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options		Option Exercise Price		Option Expiration Date	Number of Shares or Units of Stock That Have Not Vested		Market Value of Shares or Units of Stock That Have Not Vested		Equity Incentive Plan Awards: Number of Unearned Shares, Units, or Other Rights That Have Not Vested		Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights That Have Not Vested
William B. Prouty (3)		150,000		-		-	$	7.45	21-Jun-09		-		-		-		-
Michael P. Hydanus (4)		-		5,000		-	$	5.50	14-Nov-17		-		-		-		-
Michael P. Hydanus (2)(5)		10,000		5,000		-	$	6.00	15-Apr-15		-		-		-		-
Vincent L. Kasch (1)(6)		15,000		5,000		-	$	13.25	15-Mar-14		-		-		-		-
Vincent L. Kasch (4)		-		5,000		-	$	5.50	14-Nov-17		-		-		-		-

(1)

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. Mr. Kasch was vested in 5,000 of the options on the first anniversary of his acceptance of the employment offer, and an additional 5,000 of the options on each of the following three such anniversaries. The options will vest immediately in the event of an acquisition of more than 50% of the Company’s stock by a single shareholder (or affiliated shareholders) or a change in the majority of the members of the Company’s Board of Directors within a six-month period.

(2)

(3)	Represents stock options awarded pursuant to Mr. Prouty’s Employment Agreement and Executive Stock Option Plan. Fifty percent (50%) of the options vested on February 1, 2007 and the remaining fifty percent (50%) vested on June 21, 2007.

(4)	One-third (1/3) of the options vest on each of November 14, 2008, November 14, 2009, and November 14, 2010.

(5)	Two-thirds (2/3) of the options vested July 2, 2007 and the remaining one-third (1/3) will vest on April 15, 2008.

(6)	Seventy-five percent (75%) of the options vested July 2, 2007 and the remaining twenty-five percent (25%) will vest on March 15, 2008.

Option Exercises and Stock Vested in 2007

No stock options were exercised and no stock awards vested with respect to the named executive officers during the fiscal year ended December 31, 2007.

Pension Benefits in 2007

No executives received payments or other benefits at, following, or in connection with his retirement.

Nonqualified Deferred Compensation in 2007

The Company currently has no plan that provides for nonqualified deferred compensation.

Potential Payments Upon Termination or Change in Control

The following summaries set forth the potential payments and benefits that would be provided to each of our named executive officers upon termination of their employment or a change in control of the Company under the executive’s employment agreement, if any, and our other compensation plans and programs.

William B. Prouty

Mr. Prouty entered into a CEO Engagement Agreement with the Company on February 1, 2007, as amended effective January 31, 2008, pursuant to which he will be paid an annual salary of $400,000 and may, if certain conditions are satisfied, be entitled to a $600,000 payment upon a Change of Control Transaction, as further described below.

Change of Control

In the event of a Change of Control Transaction that is either approved by the Board or pursuant to which the Company and/or its shareholders receive consideration equivalent to at least $7.50 per share (after taking into account the Change of Control payment to Mr. Prouty) and that it is consummated on or before December 31, 2008, the Company is required to pay Mr. Prouty $600,000 in cash concurrently with the consummation of such Change of Control Transaction.

For purposes of the CEO Engagement Letter, a “Change of Control Transaction” means any transaction or series of transactions that result in (i) the acquisition by any person (or persons who would be deemed a person under Section 13d-3 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder) of 50% or more of the outstanding shares of the Company’s common stock, or (ii) the sale of other transfer or disposition of all or substantially all of the consolidated assets of the Company; in each case, whether structured as a tender or exchange offer, share exchange, merger, consolidation, business combination, recapitalization, reorganization, liquidation, dissolution, or similar transaction or series of transactions. The consummation of the merger pursuant to the Americo Merger Agreement will constitute a qualifying Change of Control Transaction under the Employment Agreement, which will trigger the $600,000 change of control payment to Mr. Prouty.

Termination Without Cause

The Board may terminate Mr. Prouty’s engagement under his CEO Engagement Agreement at any time without any Cause, provided that, so long as Mr. Prouty is not in violation of any of the provisions of the Non-Solicitation, Confidentiality and Discoveries and Works Clause of his CEO Engagement Agreement, the Company shall continue to make salary payments to Mr. Prouty until the earlier of (i) the consummation of a Change of Control Transaction (as defined in the Employment Agreement), including without limitation the consummation of the merger pursuant to the Agreement and Plan of Merger, dated January 14, 2008, between Americo Life, Inc. and FIC (the "Americo Merger Agreement"), (ii) 5:00 p.m. on the 30th day following written notice to Mr. Prouty stating FIC's intention to terminate the Employment Agreement (or such later date specified in such written notice) or (iii) 5:00 p.m. on December 31, 2008.

Termination for Cause

The Board may immediately terminate Mr. Prouty’s engagement for Cause by giving him written or oral notice of such termination. Upon termination for Cause, Mr. Prouty shall receive only accrued and unpaid salary and benefits as of the date of termination.

For purposes of the CEO Engagement Letter, "Cause" is defined as any of the following: (a) the failure of Mr. Prouty to be present for work for five or more consecutive business days (except during vacation and periods of illness as set forth herein), without giving prior written notice to the Board (if it is reasonably practicable to do so) and receiving approval of the Board of such absence (which approval shall not be unreasonably withheld); (b) Mr. Prouty’s conviction of or plea of nolo contendere to any felony or any crime involving moral turpitude; (c) Mr. Prouty's material breach of his CEO Engagement Agreement; (d) Mr. Prouty willfully disobeys a lawful and reasonable direction of the Board that is consistent with and reasonably related to his position and responsibilities as chief executive officer, and fails to cure such disobedience within ten days following his receipt of written notice thereof describing in reasonable detail the nature of the alleged disobedience; or (e) Mr. Prouty's fraud, willful misconduct, or theft in connection with his engagement with the Company. During any cure period, Mr. Prouty will be given an opportunity to appear, with his counsel if he so desires, before the Board to hear and respond to such allegations of Cause.

Termination Due to Incapacity or Death

If Mr. Prouty becomes incapacitated, the Board may, by giving him written notice, terminate his engagement as CEO effective as of the date provided in such notice. In the event of such termination, Mr. Prouty shall be entitled to accrued and unpaid salary and benefits as of the date of termination and no other payments or benefits except pursuant the Exculpation and Indemnification Clause of his CEO Engagement Agreement and his Stock Option Agreement.

The engagement of Mr. Prouty shall automatically terminate upon his death. Upon such termination, Mr. Prouty 's estate or, if applicable, his heirs shall be entitled only to his accrued and unpaid salary and benefits as of the date of termination and thereafter no other payments or benefits shall be owed by the Company to Mr. Prouty except pursuant to the Exculpation and Indemnification Clause of his CEO Engagement Agreement and his Stock Option Agreement.

Voluntary Termination

Mr. Prouty may terminate his engagement with the Company, for Good Reason as defined below or without Good Reason, at any time upon thirty days prior written notice. In the event of termination without Good Reason, Mr. Prouty shall be entitled to accrued salary and benefits as of the date of termination and no other further payments or benefits except pursuant the Exculpation and Indemnification Clause of his CEO Engagement Agreement and his Stock Option Agreement. In the event of termination under for Good Reason, Mr. Prouty shall be entitled to all such payments and benefits as he would have been entitled to had such termination been by the Company without Cause.

"Good Reason" means any of the following: (i) any reduction of Mr. Prouty's status, title, position, scope of authority, or responsibilities (including reporting responsibilities), or the assignment by the Company to Mr. Prouty of any duties or responsibilities that are materially inconsistent with such status, title, position, authority, or responsibilities; (ii) any material breach of his CEO Engagement Agreement by the Company, including without limitation any failure by the Company to provide Mr. Prouty with the compensation and benefits called for by his CEO Engagement Agreement; (iii) the Company's requiring Mr. Prouty to relocate his office location more than fifty (50) miles from his initial office location in Austin, Texas (excluding reasonable business-related travel); provided, that such relocation shall not constitute "Good Reason" so long as (x) the Company provides a reasonably comparable apartment and car in such new location and (y) such new location is within the continental United States (48 contiguous states and the District of Columbia) and is the Company's then principal executive office; (iv) the consummation of a Change of Control Transaction; or (v) any other action, omission, event, or circumstance that under applicable law constitutes constructive termination by the Company of Mr. Prouty's engagement.

Michael P. Hydanus

Pursuant to the terms of his COO Letter, Mr. Hydanus may be entitled to certain payments and benefits upon a termination of his employment or a change in control of the Company, as described below. Mr. Hydanus’ salary for 2007 was $247,524, and his eligibility for an annual bonus is determined prior to the beginning of each fiscal year, based on goals established by Mr. Hydanus and the board of directors.

Termination Without Cause; Good Reason; Change in Control

In the event Mr. Hydanus is terminated without Cause, or he terminates his employment with Good Reason, he will be entitled to a continuation of salary payments for twelve months after the date of termination. In the event Mr. Hydanus is terminated without Cause, or he terminates his employment with Good Reason, at any time within twelve months of a Change of Control, he will be entitled to a continuation of salary payments for twenty-four months after the date of termination. In addition, upon a Change of Control, the options granted to Mr. Hydanus pursuant to the COO Letter will immediately become vested.

For purposes of the COO Letter, "Good Reason" exists if the Company takes any of the following actions with regard to Mr. Hydanus’ employment: (a) makes a significant reduction in his duties, authority, or responsibilities; (b) materially reduces his salary, target bonus, or fringe benefits relative to those of its other senior executives; (c) requires him to relocate from the Austin, Texas metropolitan area; or (d) fails to obtain the assumption of the COO Letter by any of its successors, including any purchaser of all or substantially all of the Company's assets.

For purposes of the COO Letter, "Change of Control" means (i) acquisition by a single shareholder (or affiliated shareholders) of more than 50% of the Company's stock or (ii) a change in the majority of the members of the Company's Board of Directors within a six-month period.

Termination Due to Disability

If Mr. Hydanus becomes disabled by injury, disease, or mental condition, the Company may terminate his employment, upon which he will be entitled to continue to receive his salary for the lesser of (i) any waiting period set forth in any disability policy maintained by the Company that covers him or (ii) six months after termination of his employment.

Termination for Cause

In the event Mr. Hydanus is terminated for Cause, defined as (i) conviction of a crime involving dishonesty, fraud, breach of trust, or violation of the rights of employees; (ii) willful engagement in any misconduct in the performance of duties that, in the opinion of the Company, could materially injure the Company; (iii) performance of any act that, if known to customers, agents, employees, or stockholders of the Company, could, in the opinion of the Company, materially injure the Company; or (iv) continued willful and substantial nonperformance of assigned duties for at least ten days after receipt of notice from the Company of such nonperformance and of the Company's intention to terminate employment because of such nonperformance, he will be entitled to receive only his accrued but unpaid salary and vacation pay.

Voluntary Termination; Termination Due to Death

Either Mr. Hydanus or the Company may terminate his employment at any time. If Mr. Hydanus terminates his employment without Good Reason or if he dies while an employee of the Company, he or his estate will be entitled to receive only his accrued but unpaid salary and vacation pay.

Vincent L. Kasch

Pursuant to the terms of his February 17, 2004 employment letter and a Change of Control agreement with the Company effective September 7, 2006, Mr. Kasch may be entitled to certain payments and benefits upon a termination of his employment or a change in control of the Company, as described below. His salary for 2007 and 2006 was $189,157 and $178,919, respectively.

Change in Control and Termination Without Cause

Pursuant to the terms of Mr. Kasch’s employment letter, if the Company discharges him from employment without cause, he will be entitled to a continuation of his salary payments for six months after the date of termination. Mr. Kasch’s employment letter also provides that the options granted to him pursuant to such employment letter (see “Outstanding Equity Awards at Fiscal Year-End 2007”) will immediately become vested in the event of (i) an acquisition of more than 50% of the Company’s stock by a single shareholder (or affiliated shareholders) or (ii) a change in the majority of the members of the Company’s Board of Directors within a six-month period.

In addition, pursuant to the terms of Mr. Kasch’s Change of Control agreement, in the event a Change of Control occurs, and Mr. Kasch’s employment is terminated without Cause within twelve months after such Change of Control, his then-current bi-weekly salary and benefits, including but not limited to health and life insurance, will continue to be paid by the Company for twelve months following the 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 his termination occurs (the “Following Calendar Year”), any remaining payments that would otherwise be made 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.

For purposes of Mr. Kasch’s Change of Control agreement, "Change of Control" means (i) any one person, or more than one person acting as a group (as defined pursuant to the Securities Exchange Act of 1934), acquires ownership of stock of 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 pursuant to the Securities Exchange Act of 1934), 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, Investors Life Insurance Company of North America (ILINA) or Family Life Insurance Company (FLIC) that have a total gross fair market value equal to or more than 80 percent of the total gross fair market value of all of the assets of FIC, ILINA or FLIC 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 such appointment or election.

For purposes of Mr. Kasch’s Change of Control agreement, “Cause” means (i) conviction of a crime involving dishonesty, fraud, breach of trust, or violation of the rights of employees; (ii) willful engagement in any misconduct in the performance of duties that, in the opinion of the Company, could materially injure the Company; (iii) performance of any act that, if known to customers, agents, employees, or stockholders of the Company, could, in the opinion of the Company, materially injure the Company; or (iv) continued willful and substantial nonperformance of assigned duties for at least ten days after receipt of notice from the Company of such nonperformance and of the Company’s intention to terminate employment because of such nonperformance.

Compensation of Directors in 2007

The following table sets forth certain information with respect to the compensation of each member of the Company’s Board of Directors during the fiscal year ended December 31, 2007.

Name	Fees Earned or Paid in Cash		Stock Awards (1)		Option Awards (2)(3)		Non-Equity Incentive Plan Compensation		Change in Pension Value and Nonqualified Deferred Compen-sation Earnings		All Other Compensation		Total
R. Keith Long	$	40,000	$	41,999	$	8,527		-		-		-	$	90,526

John D. Barnett	$	39,000	$	15,996	$	8,527		-		-		-	$	63,523

Patrick E. Falconio	$	60,750	$	21,998	$	8,527		-		-		-	$	91,275

Richard H. Gudeman	$	56,000	$	16,994	$	8,527		-		-		-	$	81,521

Robert A. Nikels	$	59,000	$	18,495	$	4,947		-		-		-	$	82,442

Lonnie L. Steffen	$	63,000	$	21,000	$	8,527		-		-		-	$	92,527

Kenneth J. Shifrin	$	60,500	$	21,000	$	8,527		-		-		-	$	90,027

Eugene J. Woznicki	$	43,000	$	14,496	$	8,527		-		-		-	$	66,023

(1)

Represents stock received in lieu of cash payments for director fees under FIC Stock Plan for Non-Employee Directors. FIC common stock shares paid to each director are as follows:

Long - 6,942; Barnett - 2,644; Falconio - 3,636; Gudeman - 2,809; Nikels - 3,057; Steffen - 3,471; Shifrin - 3,471; Woznicki - 2,396

(2)

Represents stock compensation expense recognized under SFAS No. 123R.

(3)

Each director was granted 25,000 options, all of which remain outstanding as of December 31, 2007. The grant date fair value for the awards to Messrs Long, Barnett, Falconio, Gudeman, Steffen, Shifrin, and Woznicki is $51,308. The grant date fair value for the award to Mr. Nickels is $46,698.

Pursuant to FIC’s director compensation policy, 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.

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. This plan was approved by the shareholders on June 29, 2007 and the above options were granted at that time.

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.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of our board of directors currently consists of Messrs. Woznicki, Falconio 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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Stock Ownership of Certain Beneficial Owners

The following table presents information as of February 29, 2008, 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)	9.46%
6836 Bee Caves Road, Suite 262
Austin, Texas 78746
Investors Life Insurance Company of North America	1,427,073 (2)	12.23%
6500 River Place Blvd., Building One
Austin, TX 78730
Fidelity Management & Research Company	1,294,465 (3)	12.64%
82 Devonshire Street
Boston, MA 02109
Financial & Investment Management Group, Ltd.	944,466 (4)	9.22%
111 Cass St.
Traverse City, MI 49684
R. Keith Long
Otter Creek Partners I, L.P.
Otter Creek International, Ltd.	592,374 (5)	5.78%
222 Lakeview Avenue, Suite 1130
West Palm Beach, FL 33401

(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). The Schedule 13G filed on February 4, 2005 states that Roy F. Mitte had the shared power to vote or direct the vote of, and to dispose or direct the disposition of, the shares held by the Foundation. However, Mr. Mitte died on January 27, 2007, and the Foundation has not yet filed an amendment to its Schedule 13G to update such information.

(2)	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.

(3)

As reported to the Company on a Schedule 13G/A filed on February 14, 2007, 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 1,294,465 shares or 13.116% 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 1,294,465 shares or 13.116% of the Common Stock outstanding. This percentage is as of the Schedule 13G/A filing date of February 14, 2007. 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.

(4)

Based on information reported on a Schedule 13G filed by Financial & Investment Management Group, Ltd. on January 29, 2008. 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.

(5)

Based on information reported on a Schedule 13D filed jointly by R. Keith Long, Otter Creek Partners I, L.P. (“OCP”), and Otter Creek International, Ltd. (“OCI”) on January 3, 2008. According to the 13D filing, all shares are held by the respective individuals or entities for investment purposes. Mr. Long serves as the sole director and sole shareholder of Otter Creek Management, Inc. (“OCM”). OCM serves as the sole general partner of OCP and investment advisor of OCP and OCI. Mr. Long disclaims beneficial ownership of the shares held by OCP and OCI, except to the extent of his pecuniary interest therein.

Stock Ownership of Management

The following table sets forth certain information regarding the beneficial ownership of Common Stock as of February 29, 2008, by (i) each director, (ii) the named executive officers of the Company listed in the Summary Compensation Table above and (iii) the directors and executive officers of the Company as a group:

Name and Address	Number of Shares Owned	Percent of Outstanding Shares

Non-Employee Directors:
R. Keith Long	592,374 (1)(4)	5.78%
John D. Barnett	8,391 (4)	*
Patrick E. Falconio	12,009 (4)	*
Richard H. Gudeman	7,057 (4)	*
Robert A. Nikels	6,270 (4)	*
Lonnie L. Steffen	8,718 (4)	*
Kenneth J. Shifrin	8,718 (3)(4)	*
Eugene J. Woznicki	8,644 (4)	*

Current Executive Officers:
William B. Prouty	150,000 (5)	1.46%
Vincent L. Kasch	15,737 (2)(5)	*
Michael P. Hydanus	10,307 (2)(5)	*

Directors, executive officers and other persons as a group (11 persons)	828,225	8.09%

* 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)

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 (of which Otter Creek Management, Inc. serves as general partner); Otter Creek International, Ltd, an investment corporation. 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.

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

(3)	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.

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

(5)	Includes stock options that are exercisable and considered beneficially owned.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Related Party Transactions in 2007

FIC entered into an Engagement Letter (the "Engagement Letter"), dated February 1, 2007, between FIC and DLB Capital Fund FNIN, LLC ("DLB"), pursuant to which FIC agreed to pay DLB $439,996 for management consulting services over the term of the Engagement Letter, which shall terminate on January 31, 2008, unless terminated earlier in accordance with the Engagement Letter. DLB is a Wilton, Connecticut-based Private Equity firm focusing primarily on the financial services sector. The group was formed to specialize in management buyouts, corporate divestitures, leveraged buyouts, re-capitalizations and public to private transactions. At the effective date of the Engagement Letter, William Prouty had a business relationship with DLB but he no longer maintains any affiliation with DLB. For the year ended December 31, 2007, FIC has incurred expenses totaling $421,659 under this agreement, including payments of $366,660. The agreement terminated on January 31, 2008 pursuant to the terms of the Engagement Letter.

Review and Approval of Related Party Transactions

The Company and its subsidiary companies are committed to maintaining the highest legal and ethical standards in the conduct of their business. This commitment applies without exception to all their activities as they:

sell and deliver products and services to producers and customers;

fulfill contractual commitments and other agreements, including those related to financial transactions;

authorize and account for the use of the Company’s assets;

prepare and file financial statements with state and federal regulatory agencies;

carry out their obligation to shareholders, the public, and employees.

The Company places heavy reliance on individual good judgment and character. The Company requires that all employees, officers and directors act in full compliance with the policies set forth in the Business Ethics and Practices Policy Statement (“Policy”) and in a manner consistent with the highest ethical standards. Failure by an employee or officer to observe these policies may result in disciplinary action, up to and including termination of employment. Furthermore, violations of this Policy may also be violations of the law and may result in civil or criminal penalties for supervisors and/or the Company.

Employees, officers and directors must notify the Company’s Chief Executive Officer or General Counsel of any business relationship or proposed business transaction the Company may have with any company in which the employee, officer or director or a related party has a direct or indirect interest or from which the employee, officer or director or a related party may derive a benefit, or where a related party member is employed, if such a relationship or transaction might give rise to the appearance of a conflict of interest.

This Policy is communicated to all employees, officers and directors. This Policy, together with an acknowledgment which requests both assent to the Policy and appropriate disclosures, is distributed annually.

The Company requires that all employees, officers and directors act in full compliance with the policies set forth in this Policy and in a manner consistent with the highest ethical standards. Failure by any employee or officer to observe these policies may result in disciplinary action, up to and including termination of employment. Furthermore, violations of this Policy may also be violations of the law and may result in civil or criminal penalties for supervisors and/or the company.

An employee or officer who knows of or reasonably suspects a violation of the legal, ethical or business standards enunciated in this policy must report the matter to his or her immediate supervisor who in turn must advise the General Counsel or his designee.

If the employee or officer believes it necessary to make the report only to the General Counsel, he or she may do so. A director who knows of or reasonably suspects a violation of the legal, ethical or business standards enunciated in this Policy must report the matter to the Audit Committee of the Board of Directors. Reports may be made orally or in writing.

After consulting with the appropriate corporate officer, the General Counsel, or his designee will:

Conduct appropriate investigations;

Report his findings and recommendations to the Chief Executive Officer and/or to other appropriate members of management. If the General Counsel deems it necessary, he may make a report directly to the Chairman of the Audit Committee;

Report, when appropriate, information to public officials for prosecution of the wrongdoer and take action to maximize the recovery of assets.

After such investigation and report, management will take appropriate remedial actions. The General Counsel will be informed of all such actions.

No reprisal shall be taken against any person who in good faith makes allegations of violations under this policy.

Management shall take no action with respect to employees reported or alleged to have violated this policy without prior review of the proposed action by Human Resources and the Legal Department.

The Chief Executive Officer or the General Counsel must report, at least annually, to the Board of Directors of the Company and the Board of Directors of the applicable FIC Insurance Group Company on compliance with this policy, except that any violation which might result in a significant financial loss to the Company must be reported as soon as practicable.

This Policy can be found in its entirety on our website at www.ficgroup.com in the corporate governance section.

Director Independence

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.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table reflects fees for audit services rendered by BDO Seidman, LLP, the Company’s principal accounting firm, for the audit of the year ended December 31, 2007 and by Deloitte & Touche LLP for the audit of the year ended December 31, 2006 and fees billed for other services by BDO Seidman, LLP and Deloitte & Touche LLP during those periods, respectively:

	2007				2006
	BDO Seidman		Deloitte		Deloitte

Audit fees	$	1,150,000	$	185,564	$	2,640,008
Audit-related fees		-		36,982		-
Tax fees		-		-		-
All other fees		-		-		-

Total fees billed	$	1,150,000	$	222,546	$	2,640,008

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 fees consist 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 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 fees consist 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.

PART IV

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

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

Financial Statements (See Item 8)

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

Report of Independent Registered Public Accounting Firm for the year ended December 31, 2007

Report of Independent Registered Public Accounting Firm for the years ended December 31, 2006 and 2005

Consolidated Balance Sheets, as of December 31, 2007 and 2006.

Consolidated Statements of Operations, for the years ended December 31, 2007, 2006, and 2005.

Consolidated Statements of Changes in Shareholders’ Equity, for the years ended December 31, 2007, 2006, and 2005.

Consolidated Statements of Cash Flows, for the years ended December 31, 2007, 2006, and 2005.

Notes to Consolidated Financial Statements.

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

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

Schedule II - Condensed Financial Statements of Registrant.

Schedule III - Supplementary Insurance Information.

Schedule IV - Reinsurance.

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

Exhibits filed with this report or incorporated herein by reference are as listed in the Index to Exhibits beginning on Page 72.

(b)

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.

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/ William B. Prouty	By:	/s/Vincent L. Kasch
William B. Prouty, President		Vincent L. Kasch, Chief Financial Officer,
and 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 March 17, 2008.

/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		/s/ Patrick E. Falconio
EUGENE WOZNICKI, DIRECTOR		PATRICK E. FALCONIO, DIRECTOR

EXHIBIT INDEX

Exhibit No.		Description of Exhibit
2.1		Stock Purchase Agreement by and between Family Life Corporation and The Manhattan Life Insurance Company dated December 8, 2006 (19)
2.2		Agreement and Plan of Merger by and between Financial Industries Corporation, Americo Life, Inc., and Americo Acquisition Corp. dated January 14, 2008 (25)
2.3		Amendment No. 1 to Agreement and Plan of Merger by and between Financial Industries Corporation, Americo Life, Inc., and Americo Acquisition Corp. dated February 20, 2008 (25)
3.1		Articles of Incorporation of Financial Industries Corporation (1)
3.2		Certificate of Amendment to the Articles of Incorporation of FIC, dated November 12, 1996 (2)
3.3		Bylaws of Financial Industries Corporation (1)
3.4		Amendment to Bylaws of Financial Industries Corporation dated February 29, 1992 (5)
3.5		Amendment to Bylaws of Financial Industries Corporation dated June 16, 1992 (5)
3.6		Amendment to Articles of Incorporation of Financial Industries Corporation dated May 18, 2001 (6)
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 (8)
10.01		Senior Notes Subscription Agreement between FIC and InCapS Funding I, Ltd. (8)
10.02		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 (8)
10.03		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 (3)
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 (4)
10.05		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 (10)
10.06		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 (17)
10.07		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 (3)
10.08		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 (4)
10.09		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 (10)
10.10		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 Financial Industries Corporation in favor of Investors Life Insurance Company of North America (17)
10.11		Non-Qualified Deferred Compensation Plan (10)
10.12		Financial Industries Corporation Equity Incentive Plan, dated November 4, 2002 (7)
10.13		Amended and Restated Stock Option Grant Agreement (6)
10.14		Financial Industries Corporation Stock Fee Plan for Non-Employee Directors, effective as of September 30, 2005 (16)
10.15		Financial Industries Corporation 2004 Incentive Stock Plan (24)
10.16		Stock Option Plan for Non-Employee Directors (24)
10.17		Stock Purchase and Option Agreement by and between Financial Industries Corporation and American Physicians Service Group, Inc.(8)
10.18		Stock Option Agreement by and among Financial Industries Corporation, Equita Financial and Insurance Services of Texas, Inc., and, solely for purposes of Section 4.5 of the agreement, M&W Insurance Services, Inc. (8)
10.19		Stock Option Agreement between Financial Industries Corporation and William P. Tedrow (8)
10.20		Registration Rights Agreement by and among Financial Industries Corporation, American Physicians Service Group, Inc., M&W Insurance Services, Inc., Equita Financial and Insurance Services of Texas, Inc. (8)

10.21		Investment Management Agreement dated as of October 20, 2003 by and between, Investors Life Insurance Company of North America and Conning Asset Management Company (10)
10.22		Lease Agreement dated as of June 1, 2005, between Investors Life Insurance Company of North America and River Place Pointe, L.P. (10)
10.23		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 (10)
10.24		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 (10)
10.25		Employment Letter dated February 17, 2004 provided to Vincent L. Kasch (11)
10.26		Letter of Agreement effective September 7, 2006 by and between Vincent L. Kasch and Financial Industries Corporation regarding change of control (18)
10.27		Employment Letter dated April 19, 2005 provided to Michael P. Hydanus regarding position of Chief Operating Officer (9)
10.28		Employment Letter dated January 1, 2006 provided to Michael P. Hydanus regarding position of Chief Executive Officer (13)
10.29		Severance Agreement dated September 27, 2005 by and between Bruce Boisture and Financial Industries Corporation (12)
10.30		Consulting Agreement effective January 5, 2006 by and between Theodore A. Fleron and Financial Industries Corporation (14)
10.31		CEO Engagement Agreement dated February 1, 2007 by and between William Prouty and Financial Industries Corporation (20)
10.32		Amendment No. 1 to CEO Engagement Agreement dated January 31, 2008 by and between William Prouty and Financial Industries Corporation (26)
10.33		Stock Option Agreement dated February 1, 2007 between Financial Industries Corporation and William Prouty (20)
10.34		Engagement letter dated February 1, 2007 confirming the agreement between DLB Capital Fund FNIN, LLC and Financial Industries Corporation (20)
10.35		Coinsurance Agreement by and between Investors Life Insurance Company of North America and Family Life Insurance Company dated December 29, 2006 (19)
10.36		Administrative Services Agreement between FIC Insurance Services, L.P. and Family Life Insurance Company dated December 29, 2006 (19)
10.37		Employment Letter dated February 22, 2007 provided to William McCarthy regarding position of Senior Vice President and Chief Actuary (21)
10.38		Letter of Agreement dated April 26, 2007 by and between William McCarthy and Financial Industries Corporation regarding change of control (22)
14.1		Code of Ethics for Senior Executives and Financial Officers (10)
14.2		Business Ethics and Practices Policy (10)
16.1		Letter dated September 14, 2005 regarding change of independent accountant (15)
16.2		Letter dated September 12, 2007 regarding change of independent accountant (23)
23.1		Consent of Independent Registered Public Accounting Firm *
23.2		Consent of Independent Registered Public Accounting Firm *
21.1		Subsidiaries of the Registrant *
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 Certifications Pursuant to 18 U.S.C. Section 1350 *
32.2		Chief Financial Officer’s Certifications Pursuant to 18 U.S.C. Section 1350 *

* Filed herewith.

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

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

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

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

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

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

(7)	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.

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

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

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

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

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

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

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

(15)	Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated September 14, 2005.

(16)	Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated September 30, 2005.

(17)	Incorporated by reference to the Exhibits filed with FIC’s Annual Report on Form 10-K for the year ended December 31, 2004.

(18)	Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated September 7, 2006.

(19)	Incorporated by reference to the Exhibits filed with FIC’s Annual Report on Form 10-K for the year ended December 31, 2005.

(20)	Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated February 7, 2007.

(21)	Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated March 1, 2007.

(22)	Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated May 7, 2007.

(23)	Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated September 6, 2007.

(24)	Incorporated by reference to the Definitive Proxy Statement on Schedule 14A filed on June 5, 2007.

(25)	Incorporated by reference to the Preliminary Proxy Statement on Schedule 14A dated February 20, 2008.

(26)	Incorporated by reference to the Exhibits filed with FIC’s Current Report on Form 8-K dated February 6, 2008.

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, 2007 and 2006	F-4

	Consolidated Statements of Operations for the years ended December 31, 2007, 2006, and 2005	F-6

	Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007, 2006, and 2005	F-8

	Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005	F-11

	Notes to Consolidated Financial Statements	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-49

	Schedule II – Condensed Financial Information of Registrant	F-50

	Schedule III – Supplementary Insurance Information	F-53

	Schedule IV – Reinsurance	F-54

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 Corporation and subsidiaries (the “Company”) as of December 31, 2007 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year ended December 31, 2007. Our audit also included the 2007 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 and schedules 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, 2007 and the results of their operations and their cash flows for the year ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the 2007 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 have also audited, 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, 2007, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 17, 2008 expressed an unqualified opinion thereon.

BDO SEIDMAN, LLP

Dallas, Texas

March 17, 2008

F-2

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 Corporation and subsidiaries (the “Company”) as of December 31, 2006 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2006. Our audits also included the 2006 and 2005 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 audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audits provide 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, 2006 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the 2006 and 2005 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.

As discussed in Note 11 to the consolidated financial statements, the Company changed its method of accounting for the funded status of its defined benefit pension plan as required by accounting guidance which the Company adopted on December 31, 2006.

DELOITTE & TOUCHE LLP

Dallas, Texas

May 30, 2007

F-3

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,

	2007		2006
	(In thousands)
ASSETS

Investments:
Fixed maturity securities available for sale, at fair value (amortized cost of $507,977 and $536,618 at December 31, 2007 and 2006)	$	499,274	$	520,957
Equity securities, at fair value (cost of $7,474 and $6,534 at December 31, 2007 and 2006)		9,573		9,805
Policy loans		27,959		30,189
Short-term investments		-		7,473
Total investments		536,806		568,424

Cash and cash equivalents		49,439		55,603
Deferred policy acquisition costs		15,285		14,429
Present value of future profits of acquired business		6,565		7,749
Agency advances and other receivables, net of allowance for doubtful accounts of $221 and $173 at December 31, 2007 and 2006		3,397		929
Reinsurance receivables		27,510		29,061
Accrued investment income		6,592		6,772
Deferred income taxes		294		1,891
Due premiums		201		237
Property and equipment, net		258		550
Other assets		2,370		1,679
Separate account assets		338,743		350,987

Total assets	$	987,460	$	1,038,311

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,

	2007			2006
	(In thousands, except share data)
LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Policy liabilities and contractholder deposit funds:
Contractholder deposit funds	$	424,941		$	453,671
Future policy benefits		114,878			117,097
Other policy claims and benefits payable		7,273			6,907
Notes payable		15,000			15,000
Other liabilities		19,170			33,968
Separate account liabilities		338,743			350,987
Total liabilities		920,005			977,630

Commitments and contingencies (Notes 12 and 13)

Shareholders’ equity:
Common stock, $.20 par value; 25,000,000 shares authorized; 12,533,798 and 12,533,402 shares issued in 2007 and 2006; 10,240,896 and 10,210,385 shares outstanding in 2007 and 2006		2,507			2,507
Additional paid-in capital		70,174			70,046
Accumulated other comprehensive loss		(5,761	)		(9,586	)
Retained earnings		20,113			17,703
Treasury stock, at cost; 2,292,902 and 2,323,017 shares in 2007 and 2006		(19,578	)		(19,989	)
Total shareholders’ equity		67,455			60,681

Total liabilities and shareholders’ equity	$	987,460		$	1,038,311

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,

	2007			2006			2005
	(In thousands)

Revenues:
Premiums, net	$	8,323		$	5,921		$	5,020
Earned insurance charges		30,386			31,745			32,803
Net investment income		31,005			29,321			25,841
Real estate income, net		-			-			575
Net realized gains on real estate		-			517			9,243
Net realized gains (losses) on fixed maturities and other investments		78			(11	)		(631	)
Other		7,069			4,920			2,705
Total revenues		76,861			72,413			75,556

Benefits and expenses:
Policyholder benefits and expenses		30,796			26,731			29,850
Interest expense on contractholder deposit funds		17,225			17,976			18,439
Amortization of deferred policy acquisition costs		2,066			1,156			1,604
Amortization of present value of future profits of acquired business		988			902			1,146
Operating expenses		20,375			20,614			21,808
Interest expense		1,427			1,410			1,147
Total benefits and expenses		72,877			68,789			73,994

Income from continuing operations before federal income taxes		3,984			3,624			1,562

Federal income tax expense (benefit):
Current		(189	)		(148	)		470
Deferred		577			3,057			150

Income from continuing operations		3,596			715			942

Loss from discontinued operations, net of taxes (Note 2)		-			(25,497	)		(1,107	)

Net income (loss)	$	3,596		$	(24,782	)	$	(165	)

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,

	2007		2006			2005
	(In thousands, except per share data)

Net income (loss) per share:

Basic:
Weighted average common shares outstanding		10,241		9,863			9,821
Basic earnings per share:

Income from continuing operations	$	0.35	$	0.07		$	0.09

Discontinued operations		-		(2.58	)		(0.11	)

Net income (loss) per share	$	0.35	$	(2.51	)	$	(0.02	)


Diluted:

Weighted average common shares and common share equivalents		10,314		9,863			9,821
Diluted earnings per share:

Income from continuing operations	$	0.35	$	0.07		$	0.09

Discontinued operations		-		(2.58	)		(0.11	)

Net income (loss) per share	$	0.35	$	(2.51	)	$	(0.02	)

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

F-7

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Additional

Common Stock

Paid-in

Amount

Capital

(In thousands)

Balance at January 1, 2005

12,517

2,504

70,398

Comprehensive income (loss):

Income from continuing operations

Loss from discontinued operations

Other comprehensive income (loss) from:

Continuing operations

Discontinued operations

Total comprehensive income (loss) from:

Continuing operations

Discontinued operations

Treasury stock distributed in lieu of cash fee

(25

)

Treasury stock contributed to Company 401(k) Plan

Balance at December 31, 2005

12,517

2,504

70,377

Comprehensive income (loss):

Income from continuing operations

Loss from discontinued operations

Other comprehensive income (loss) from:

Continuing operations

Discontinued operations

Total comprehensive income (loss) from:

Continuing operations

Discontinued operations

Adjustment to apply SFAS No. 158, net of tax

Sale of treasury stock

(324

)

Treasury stock distributed in lieu of cash fee

)

Other

)

Balance at December 31, 2006

12,534

2,507

70,046

Comprehensive income (loss):

Income from continuing operations

Loss from discontinued operations

Other comprehensive income (loss) from:

Continuing operations

Discontinued operations

Total comprehensive income (loss) from:

Continuing operations

Discontinued operations

Purchase of treasury stock

Treasury stock distributed in lieu of cash fee

(235

)

Share-based compensation expense

363

Cumulative effect of change in accounting principle for FIN 48

Balance at December 31, 2007

12,534

2,507

70,174

(continued)

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

F-8

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY, continued



	Net Unrealized Appreciation (Depreciation) of Equity Securities			Net Unrealized Gain (Loss) on Fixed Maturities Available for Sale			Pension Adjustments			Total Accumulated Other Comprehensive Income (Loss)
	(In thousands)

Balance at January 1, 2005	$	1,446		$	(1,017	)	$	(5,096	)	$	(4,667	)
Comprehensive income (loss):
Income from continuing operations
Loss from discontinued operations
Other comprehensive income (loss) from:
Continuing operations		229			(4,183	)		(980	)
Discontinued operations		(24	)		(714	)		-
Total comprehensive income (loss) from:
Continuing operations		229			(4,183	)		(980	)		(4,934	)
Discontinued operations		(24	)		(714	)		-			(738	)
Treasury stock distributed in lieu of cash fee
Treasury stock contributed to Company 401(k) Plan

Balance at December 31, 2005		1,651			(5,914	)		(6,076	)		(10,339	)
Comprehensive income (loss):
Income from continuing operations
Loss from discontinued operations
Other comprehensive income (loss) from:
Continuing operations		484			(2,329	)		4,167
Discontinued operations		24			567			-
Total comprehensive income (loss) from:
Continuing operations		484			(2,329	)		4,167			2,322
Discontinued operations		24			567			-			591
Adjustment to apply SFAS No. 158, net of tax								(2,160	)		(2,160	)
Sale of treasury stock
Treasury stock distributed in lieu of cash fee
Other

Balance at December 31, 2006		2,159			(7,676	)		(4,069	)		(9,586	)
Comprehensive income (loss):
Income from continuing operations
Loss from discontinued operations
Other comprehensive income (loss) from:
Continuing operations		(774	)		3,687			912
Discontinued operations
Total comprehensive income (loss) from:
Continuing operations		(774	)		3,687			912			3,825
Discontinued operations
Purchase of treasury stock
Treasury stock distributed in lieu of cash fee
Share-based compensation expense
Cumulative effect of change in accounting principle for FIN 48

Balance at December 31, 2007	$	1,385		$	(3,989	)	$	(3,157	)	$	(5,761	)

(continued)

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

F-9

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY, continued



	Retained Earnings			Treasury Stock			Total Shareholders’ Equity
	(In thousands)

Balance at January 1, 2005	$	42,650		$	(23,342	)	$	87,543
Comprehensive income (loss):
Income from continuing operations		942
Loss from discontinued operations		(1,107	)
Other comprehensive income (loss) from:
Continuing operations
Discontinued operations
Total comprehensive income (loss) from:
Continuing operations		942						(3,992	)
Discontinued operations		(1,107	)					(1,845	)
Treasury stock distributed in lieu of cash fee					213			188
Treasury stock contributed to Company 401(k) Plan					173			177

Balance at December 31, 2005		42,485			(22,956	)		82,071
Comprehensive income (loss):
Income from continuing operations		715
Loss from discontinued operations		(25,497	)
Other comprehensive income (loss) from:
Continuing operations
Discontinued operations
Total comprehensive income (loss) from:
Continuing operations		715						3,037
Discontinued operations		(25,497	)					(24,906	)
Adjustment to apply SFAS No. 158, net of tax								(2,160	)
Sale of treasury stock					2,789			2,465
Treasury stock distributed in lieu of cash fee					178			174
Other								-

Balance at December 31, 2006		17,703			(19,989	)		60,681
Comprehensive income (loss):
Income from continuing operations		3,596
Loss from discontinued operations
Other comprehensive income (loss) from:
Continuing operations
Discontinued operations
Total comprehensive income (loss) from:
Continuing operations		3,596						7,421
Discontinued operations
Purchase of treasury stock					(349	)		(349	)
Treasury stock distributed in lieu of cash fee					760			525
Share-based compensation expense								363
Cumulative effect of change in accounting principle for FIN 48		(1,186	)					(1,186	)

Balance at December 31, 2007	$	20,113		$	(19,578	)	$	67,455

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,

	2007			2006			2005
	(In thousands)
Continuing Operations:

Cash flows from operating activities:
Net income (loss)	$	3,596		$	(24,782	)	$	(165	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss from discontinued operations		-			25,497			1,107
Amortization of deferred policy acquisition costs		2,066			1,156			1,604
Amortization of present value of future profits of acquired business		988			902			1,146
Net realized gains on investments		(78	)		(506	)		(8,612	)
Depreciation		314			283			1,880
Share-based compensation		363			-			-
Changes in operating assets and liabilities:
Accrued investment income		180			(514	)		(1,554	)
Agency advances and other receivables		(2,468	)		1,957			307
Reinsurance receivables		1,551			6,177			(804	)
Due premiums		36			30			15
Deferred policy acquisition costs		(4,099	)		(1,746	)		(349	)
Other assets		(691	)		50			120
Policy liabilities and accruals		3,260			(4,476	)		(1,375	)
Other liabilities		(14,798	)		11,900			(1,443	)
Deferred federal income taxes		1,079			4,683			2,138
Net activity from trading securities		-			-			1,057
Other		(691	)		4,270			1,691
Net cash provided by (used in) operating activities of continuing operations		(9,392	)		24,881			(3,237	)

Cash flows from investing activities:
Fixed maturities purchased		(87,288	)		(56,304	)		(172,201	)
Real estate capital expenditures		-			-			(544	)
Proceeds from sales and maturities of fixed maturities		115,038			54,441			59,074
Proceeds from sales of real estate		-			647			101,304
Net proceeds from sale of insurance subsidiary		-			25,002			-
Net (increase) decrease in short-term investments		7,473			(6,269	)		58,312
Net decrease in policy loans		2,230			2,747			2,365
Purchase of property and equipment		(33	)		(33	)		(316	)
Net cash provided by investing activities of continuing operations	$	37,420		$	20,231		$	47,994

(continued)

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,

	2007			2006			2005
	(In thousands)

Cash flows from financing activities:
Contractholder fund deposits	$	23,114		$	27,661		$	29,894
Contractholder fund withdrawals		(56,957	)		(56,541	)		(62,599	)
Sale (purchase) of treasury stock		(349	)		2,465			-
Net cash used in financing activities of continuing operations		(34,192	)		(26,415	)		(32,705	)

Net increase (decrease) in cash and cash equivalents		(6,164	)		18,697			12,052

Cash and cash equivalents, beginning of year		55,603			36,906			24,854

Cash and cash equivalents, end of year	$	49,439		$	55,603		$	36,906


Discontinued Operations:
Net cash provided by (used in) operating activities of discontinued operations	$	-		$	3,885		$	(6,587	)

Net cash provided by (used in) investing activities of discontinued operations		-			(28,799	)		7,378

Net cash used in financing activities of discontinued operations		-			(1,761	)		(1,306	)

Decrease in cash and cash equivalents		-			(26,675	)		(515	)

Cash and cash equivalents at beginning of year		-			26,675			27,190

Cash and cash equivalents at end of year	$	-		$	-		$	26,675


Supplemental Cash Flow Disclosures:
Income taxes refunded, net	$	(617	)	$	(5,238	)	$	(591	)

Interest paid	$	1,459		$	1,398		$	1,115

Treasury stock distributions	$	525		$	174		$	365

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

F-12

FINANCIAL INDUSTRIES CORPORATION

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 life insurance subsidiary, Investors Life Insurance Company of North America (“Investors Life”). 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, 2007. 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 wholly owned subsidiaries are: Family Life Corporation (“FLC”), FIC Realty Services, Inc. (“FIC Realty”), FIC Property Management, Inc. (“FIC Property”), FIC Financial Services, Inc., FIC Insurance Services, L.P., InterContinental Life Corporation (“ILCO”), ILG Securities Corporation, and ILG Sales Corporation.

Pending Merger

FIC entered into a definitive agreement on January 14, 2008 for the merger of the Company into a direct, wholly-owned subsidiary of Americo Life, Inc. Additionally, on January 31, 2008, the Company determined that it will immediately cease underwriting new policies. In doing so, FIC has terminated its agreements with certain independent insurance agents. FIC will continue to manage its existing block of insurance policies and will continue to earn commissions on policies sold by agents appointed with its subsidiary, ILG Sales Corporation, under marketing agreements with unrelated insurance companies. See Note 18, Subsequent Events, for additional information regarding merger.

Discontinued Operations

On December 29, 2006, Financial Industries Corporation completed the sale of its wholly owned subsidiary, Family Life Insurance Company (“Family Life”), to The Manhattan Life Insurance Company (“Manhattan Life”) for $28.0 million in cash. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment and Disposal of Long-lived Assets,” Family Life’s operations have been classified in these consolidated financial statements as discontinued operations in all periods presented. See Note 2 for further discussion of discontinued operations.

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 income tax assets, (3) valuation allowances for agency advances, (4) recoverability of deferred policy acquisition costs and present value of future profits of acquired businesses, and (5) impairment losses on fixed maturity securities.

Investments

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, 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 deferred policy acquisition costs (“DAC”) and present value of future profits of acquired business (“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.

F-13

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 and used to accrue income (loss) in subsequent accounting periods.

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.

Real estate income is reported net of expenses incurred to operate the properties and depreciation expenses.

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

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 $2,904,000 and $2,707,000 as of December 31, 2007 and 2006, respectively.

Deferred Policy Acquisition Costs (“DAC”)

The cost of acquiring new business, principally first-year commissions and certain costs 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 policy acquisition costs is evaluated periodically on an aggregate basis that combines deferred acquisition costs with the present value of future profits on acquired business. No loss recognition adjustments were necessary for the years ended December 31, 2007, 2006, and 2005.

Present Value of Future Profits on Acquired Business (“PVFP”)

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. During 2007, interest on the unamortized balance was accreted at rates from 3.8% to 8.5%.

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.

F-14

Loss recognition analysis with respect to present value of future profits is evaluated periodically on an aggregate basis that combines deferred policy acquisition costs with the present value of future profits on acquired business.

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 subsidiary does business may require that it 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. Interest assumptions varied from 4.4% to 11.0% at December 31, 2007 and 2006. 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, where appropriate. Mortality tables used are various modifications of the 1975-1980 Select & Ultimate ALB mortality tables.

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.

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

F-15

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

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” 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 including but not limited to a purchased block basis. 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

For the year 2005, the Company followed 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 (Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“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. APB 25 prescribes the intrinsic value based method of accounting for stock options. Under this method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire stock. No stock options were granted to employees for the years ended December 31, 2006 and 2005.

In December 2004, the Financial Accounting Standards Board (“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. SFAS 123(R) was originally effective July 1, 2005 but later deferred by the Securities and Exchange Commission to January 1, 2006. The adoption of this statement had no impact on the Company’s 2006 consolidated financial statements as no options were granted or outstanding during 2006.

The Company uses the simplified method calculation as defined in SEC Staff Accounting Bulletin No. 107, for “plain vanilla” options as that term is further defined in the bulletin, and represents the period of time that the options are expected to be outstanding.

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 reflect 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 (anti-dilution). Both methods are presented on the face of the accompanying consolidated statements of operations.

Adoption of New Accounting Pronouncements

Income Taxes

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes − an Interpretation of FASB Statement No. 109” ("FIN 48"), which clarifies the accounting for uncertainty in tax positions. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheets; and provides transition and interim period guidance, among other provisions. FIN 48 requires companies to determine whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. As a result of the implementation of FIN 48, the Company recognized a $1,441,000 increase in the liability for unrecognized tax benefits and a $1,186,000 increase in deferred tax assets offset by a $931,000 increase in the valuation allowance for deferred tax assets, resulting in a $1,186,000 reduction to the January 1, 2007 balance of retained earnings. The Company also reclassified to the liability for unrecognized tax benefits at adoption $3,522,000 of current tax liabilities (previously recorded as a reduction to current tax receivables) and $503,000 of deferred tax liabilities for a total unrecognized tax benefit liability of $5,466,000.

F-16

Insurance Contracts

Effective January 1, 2007, the Company adopted American Institute of Certified Public Accountants’ Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred policy acquisition costs (“DAC”) on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” SOP 05-1 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. It is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The adoption of SOP 05-1 did not have a material impact on the Company’s consolidated financial statements.

Servicing of Financial Assets

Effective January 1, 2007, the Company adopted 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. The adoption of SFAS 156 did not have a material impact on the Company’s consolidated financial statements.

Effective January 1, 2007, the Company adopted SFAS No. 155, “Accounting for Certain Hybrid Instruments” (“SFAS No. 155”). 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 re-measurement 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. The adoption of SFAS No. 155 did not have a material impact on the Company’s consolidated financial statements.

Future Adoption of New Accounting Pronouncements

F-17

2. Discontinued Operations – Sale of Family Life Insurance Company

On December 29, 2006, Financial Industries Corporation completed the sale of its wholly owned subsidiary, Family Life Insurance Company, to The Manhattan Life Insurance Company for $28.0 million in cash. In accordance with SFAS 144, the consolidated financial statements reflect the assets, liabilities and operating results of Family Life Insurance Company as discontinued operations, adjusted for certain activities as described below.

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

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

Family Life owned 648,640 shares of FIC common stock prior to the sale. Such shares were reflected as treasury stock in the Company’s consolidated financial statements. Immediately preceding and as a condition of the sale of Family Life, 324,320 of these shares were acquired by the Company and the remaining 324,320 shares remained with Family Life at the time of the sale. Accordingly, the shares that remained with Family Life are now reflected as outstanding common stock shares as of December 31, 2007 and 2006, and have been reflected as a sale of treasury stock in the accompanying consolidated financial statements.

Family Life shared certain operating costs, including personnel, premises, equipment and software, and other office and administrative expenses with FIC and its other subsidiaries through various sharing agreements. These agreements with Family Life were terminated upon its sale and Family Life (a wholly-owned subsidiary of Manhattan Life) did not retain any employees, equipment, software or liability for leases. Accordingly, the discontinued operations of Family Life were adjusted to eliminate the estimated continuing expenses associated with these shared operating costs.

F-18

Effective with the beginning of the fourth quarter of 2007, the Company made the decision to cease sales of mortgage protection term products. As the Company will no longer sell any mortgage term products subject to the coinsurance agreement, the Company recognized in income $1.3 million of the deferred revenue liability in the quarter ended September 30, 2007. This amount was reflected in other income in the accompanying consolidated statement of operations. The remaining $100,000 of the original liability balance relates to policies sold and recorded in the period from April 1, 2007 through September 30, 2007 which were subject to the coinsurance agreement. This amount will be amortized to income in future periods over the lives of these policies. Amortization of this remaining liability totaling $7,500 has been recognized through December 31, 2007.

The following table provides details regarding the operating results and loss on the sale of Family Life reported as discontinued operations in the consolidated statements of operations:

	Year Ended December 31,
	2006			2005
	(In thousands)

Revenues:
Premiums, net	$	17,122		$	18,081
Earned insurance charges		6,862			7,218
Net investment income		5,294			5,306
Net realized gains (losses) on fixed maturities and other investments		(3	)		245
Other		13			9
Total revenues		29,288			30,859

Benefits and expenses:
Policyholder benefits and expenses		12,411			10,572
Interest expense on contractholder deposit funds		2,511			3,693
Amortization of deferred policy acquisition costs		7,276			8,391
Amortization of present value of future profits of acquired business		1,278			1,565
Operating expenses		6,967			8,312
Total benefits and expenses		30,443			32,533

Loss from discontinued operations before federal income taxes		(1,155	)		(1,674	)

Federal income tax benefit		(52	)		(567	)

Loss from discontinued operations, net of tax		(1,103	)		(1,107	)
Loss from sale of discontinued operations, net of tax of $0		(24,394	)		-

Loss from discontinued operations	$	(25,497	)	$	(1,107	)

F-19

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, 2007
			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	$	34,608	$	399	$	-	$	35,007
States, municipalities and political subdivisions		19,666		187		731		19,122
Corporate		338,904		2,448		4,885		336,467
Mortgage-backed and asset-backed		114,799		206		6,327		108,678

Total fixed maturities	$	507,977	$	3,240	$	11,943	$	499,274

Equity securities available for sale	$	7,474	$	2,110	$	11	$	9,573

	December 31, 2006
			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	$	69,482	$	137	$	1,161	$	68,458
States, municipalities and political subdivisions		19,759		169		570		19,358
Corporate		324,907		744		7,171		318,480
Mortgage-backed and asset-backed		122,470		185		7,994		114,661

Total fixed maturities	$	536,618	$	1,235	$	16,896	$	520,957

Equity securities available for sale	$	6,534	$	3,282	$	11	$	9,805

Investors Life is required to maintain assets on deposit with state regulatory authorities. Such assets are included in fixed maturities and have an aggregate fair value of $5.2 million and $5.1 million at December 31, 2007 and 2006, respectively.

F-20

For investments of fixed maturities that have unrealized losses at December 31, 2007 and 2006, the fair value, gross unrealized losses, and length of time that individual securities have been in a continuous unrealized loss position are as follows:

	2007
	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	$	-	$	-	$	-	$	-	$	-	$	-
States, municipalities, and political subdivisions		3,931		36		12,991		695		16,922		731
Corporate		77,381		1,058		115,724		3,827		193,105		4,885
Mortgage-backed and asset-backed		10,623		70		91,286		6,257		101,909		6,327

Fixed maturities available for sale	$	91,935	$	1,164	$	220,001	$	10,779	$	311,936	$	11,943

	2006
	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	$	5,340	$	81	$	60,325	$	1,080	$	65,665	$	1,161
States, municipalities, and political subdivisions		5,198		86		11,969		484		17,167		570
Corporate		72,563		1,042		173,203		6,129		245,766		7,171
Mortgage-backed and asset-backed		4,271		97		102,811		7,897		107,082		7,994

Fixed maturities available for sale	$	87,372	$	1,306	$	348,308	$	15,590	$	435,680	$	16,896

At December 31, 2007, the Company held no U.S. Treasury securities with unrealized losses. At December 31, 2006, the Company held twelve U.S. Treasury securities with unrealized losses caused by market interest rate increases. The average unrealized loss on these securities was 2% of carrying value at December 31, 2006.

At December 31, 2007, the Company held four 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, rated A- or higher by a credit ratings agency, was 4% of carrying value. At December 31, 2006, the Company held four 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, rated A- or higher by a credit ratings agency, was 3% of carrying value.

At December 31, 2007, the Company held fifty-two investments in debt securities issued by corporations with unrealized losses caused primarily by market interest rate increases. The average unrealized losses on fifty-one securities with investment grade ratings (BBB- or higher) was 2% of carrying value. The unrealized loss on one security with less than investment grade rating was 22% of carrying value. At December 31, 2006, the Company held fifty-nine investments in debt securities issued by corporations with unrealized losses caused primarily by market interest rate increases. The average unrealized losses on fifty-two securities with investment grade ratings (BBB- or higher) was 3% of carrying value. The average unrealized losses on seven securities with less than investment grade ratings was 5% of carrying value, including securities issued by General Motors, Ford Motor Company, Ford Motor Credit Company and HCA with average unrealized losses of 6% of carrying value caused largely by credit ratings declines.

At December 31, 2007, the Company held twenty-five investments in mortgage-backed or asset-backed securities with unrealized losses caused by interest rate increases, including two securities with unrealized losses of less than $1,000. The average unrealized loss on these securities was 6% of carrying value. At December 31, 2006, the Company held twenty-eight investments in mortgage-backed or asset-backed securities with unrealized losses caused by interest rate increases, including five securities with unrealized losses of less than $1,000. The average unrealized loss on these securities was 7% of carrying value.

F-21

Because of 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.

During the third quarter of 2005, the Company identified a security which was considered impaired and reduced its carrying value by $918,000. This security was sold in the fourth quarter of 2005. There were no other impairments in the carrying value of investments in 2007, 2006 or 2005 which were considered other than temporary.

The Company’s fixed maturity securities reflect gross unrealized losses of $11.9 million as of December 31, 2007. Approximately 91.7% of the unrealized losses are related to investment grade securities. The Company believes these unrealized losses are primarily related to increases in market interest rates.

Investments in fixed maturities in an unrealized loss position are detailed by Standard & Poor’s credit rating as follows:

	December 31, 2007					December 31, 2006

			Gross					Gross
	Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses
	(In thousands)

AAA	$	120,573	$	(7,686	)	$	194,308	$	(10,182	)
AA		25,255		(43	)		44,657		(885	)
A		94,342		(2,144	)		138,738		(3,688	)
BBB		50,921		(1,081	)		40,681		(1,319	)
BB and other below investment grade		20,845		(989	)		17,296		(822	)
	$	311,936	$	(11,943	)	$	435,680	$	(16,896	)

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, 2007 or 2006. Due to the issuers’ continued satisfaction of their 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, 2007 and 2006 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.

F-22

The amortized values and market values of fixed maturities at December 31, 2007, 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	$	58,358	$	58,332
Due after one year through five years		128,395		129,656
Due after five years through ten years		155,258		153,194
Due after ten years		51,167		49,414
Mortgage-backed and asset-backed securities		114,799		108,678

Total fixed maturities	$	507,977	$	499,274

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, 2007, 2006, and 2005. The following is a summary of the change in unrealized gains (losses) for continuing operations, 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,
	2007			2006			2005
	(In thousands)

Fixed maturities	$	6,958		$	(5,341	)	$	(8,056	)
Equity securities		(1,172	)		733			347
Gross unrealized gains (losses)		5,786			(4,608	)		(7,709	)
Effect on other balance sheet accounts		(1,373	)		1,812			1,720
Deferred federal income taxes		(1,500	)		951			2,035

Net change in unrealized gains (losses) on investments	$	2,913		$	(1,845	)	$	(3,954	)

The following table sets forth unrealized holding gains (losses) on investments arising during the year that includes both continuing and discontinued operations and the reclassification adjustments required for the years ended December 31, 2007, 2006, and 2005:

	Year Ended December 31,
	2007		2006			2005
	(In thousands)

Reclassification adjustments:
Unrealized holding gains (losses) on investments arising during the period, net of taxes	$	2,883	$	(1,836	)	$	(3,536	)
Reclassification adjustments for gains (losses) included in net income, net of taxes		30		(9	)		(418	)

Unrealized gains (losses) on investments, net of reclassification adjustment, net of taxes	$	2,913	$	(1,845	)	$	(3,954	)

F-23

Net Investment Income

The components of net investment income are summarized as follows:

	Year Ended December 31,
	2007			2006			2005
	(In thousands)

Fixed maturities	$	27,026		$	27,453		$	23,340
Policy loans		2,119			2,192			2,369
Other		2,371			198			696
Gross investment income		31,516			29,843			26,405
Investment expenses		(511	)		(522	)		(564	)

Net investment income	$	31,005		$	29,321		$	25,841

Net Realized Gains on 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. 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. However, the prevailing market rate at the time of the sale-leaseback of the building was $18 per square foot on an annual basis. As a result, since the rental rate stated in the lease was unreasonable in relation to market conditions at the inception of the lease, a portion of the profit on the sale was deferred based on the stated rental amount in excess of the prevailing market rate.

The Company realized a gain of $10.6 million on the sale, which includes both a 2005 realized gain of $8.5 million and a deferred gain of $2.1 million to be recognized over the period from the sale date through March 31, 2008. The lease provides the Company with a right of cancellation of the lease at March 31, 2008. Accordingly, as the Company has the right to cancel the lease, the deferred portion of the gain is being amortized over the period ending March 31, 2008.

During 2005, the Company also sold three properties generating gross proceeds of $1.2 million and realized gains of $761,000. During the first quarter of 2006, the Company sold its remaining three properties generating gross proceeds of $646,000 and realized gains of $517,000.

Net Realized Investment Gains (Losses) on Fixed Maturities

Proceeds and gross realized gains (losses) from sales of fixed maturities available for sale are summarized as follows:

	Year Ended December 31,
	2007		2006		2005
	(In thousands)

Proceeds	$	42,734	$	-	$	4,547

Gross realized gains	$	586	$	-	$	32
Gross realized losses		540		-		6

Net realized gains (included in "net realized gains (losses) on fixed maturities and other investments")	$	46	$	-	$	26

Non-income Producing Investments

The Company had no investments at December 31, 2007 and 2006 that were non-income producing for the preceding twelve months.

F-24

4. Fair Values of Financial Instruments

The carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2007 and 2006 are as follows:

	2007				2006
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
	(In thousands)				(In thousands)

Financial assets:
Fixed maturity securities available for sale	$	499,274	$	499,274	$	520,957	$	520,957
Equity securities		9,573		9,573		9,805		9,805
Policy loans		27,959		33,801		30,189		36,443
Short-term investments		-		-		7,473		7,473
Cash and cash equivalents		49,439		49,439		55,603		55,603
Separate account assets		338,743		338,743		350,987		350,987

Financial liabilities:
Separate account liabilities	$	338,743	$	338,743	$	350,987	$	350,987
Deferred annuities		101,406		99,246		112,181		109,212
Notes payable		15,000		15,000		15,000		15,000
Supplemental contracts		8,965		8,965		10,003		10,003

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

Fixed Maturities 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-25

5. Deferred Policy Acquisition Costs

An analysis of deferred policy acquisition costs follows:

	Year Ended December 31,
	2007			2006			2005
	(In thousands)

Deferred policy acquisition costs, beginning of year	$	14,429		$	11,671		$	11,878
Policy acquisition costs deferred		4,099			1,746			349
Amortization, net of interest accretion		(2,066	)		(1,156	)		(1,604	)
Adjustments for unrealized gains/losses on investment securities		(1,177	)		2,168			1,048

Deferred policy acquisition costs, end of year	$	15,285		$	14,429		$	11,671

6. Present Value of Future Profits of Acquired Business

An analysis of the present value of future profits of acquired business follows:

	Year Ended December 31,
	2007			2006			2005
	(In thousands)

Present value of future profits of acquired business, beginning of year	$	7,749		$	9,007		$	9,483
Accretion of interest		547			622			762
Amortization		(1,535	)		(1,524	)		(1,908	)
Adjustments for unrealized gains/losses on investment securities		(196	)		(356	)		670

Present value of future profits of acquired business, end of year	$	6,565		$	7,749		$	9,007

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):

2008	$	802
2009	$	728
2010	$	740
2011	$	531
2012	$	413

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 with InCapS Funding I, Ltd. (“InCapS”), wherein InCapS agreed to purchase the Senior Notes. The uncollateralized 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.

The entire principal amount of the Senior 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 Senior 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. As of December 31, 2007, the Company is in compliance with all provisions of this agreement.

F-26

8. Income Taxes

The Company filed a consolidated federal income tax return with its subsidiaries, except for Investors Life and ILG Securities, which filed separate returns. Beginning in 2007 the Company is eligible to elect to file a consolidated federal income tax return with all of its subsidiaries including Investors Life and ILG Securities.

Total income taxes were allocated as follows:

	Year Ended December 31,
	2007			2006			2005
	(In thousands)

Tax provision (benefit) on income or loss from:
Continuing operations	$	388		$	2,909		$	620
Discontinued operations		-			(52	)		(567	)
Total tax provision (benefit) on income or loss		388			2,857			53

Tax provision (benefit) on components of shareholders’ equity:
Net unrealized gains/losses on:
Fixed maturities available for sale		1,899			(908	)		(2,522	)
Equity securities		(399	)		262			106
Pension liability		278			424			(28	)
Total tax provision (benefit) on shareholders’ equity		1,778			(222	)		(2,444	)

Total provision (benefit) for income taxes	$	2,166		$	2,635		$	(2,391	)

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 as a result of the following differences:

	Year Ended December 31,
	2007			2006			2005
	(In thousands)

Income taxes at the statutory rate	$	1,357		$	1,232		$	531
Increase (decrease) in taxes resulting from:
Dividends received deduction		(45	)		(42	)		(41	)
Tax liabilities		66			(411	)		-
Valuation allowance		(1,047	)		2,027			134
Other items, net		57			103			(4	)

Total provision for income taxes on continuing operations	$	388		$	2,909		$	620

F-27

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 years ended December 31, 2006 and 2005, as a result of the following differences (in thousands):

	Year Ended December 31,
	2006			2005
	(In thousands)

Income taxes at the statutory rate	$	(8,687	)	$	(569	)
Increase (decrease) in taxes resulting from:
Disallowed loss on sale of subsidiary		7,867			-
Tax on sale of parent stock		425			-
Valuation allowance		427			-
Other items, net		(84	)		2

Total benefit for income taxes on discontinued operations	$	(52	)	$	(567	)

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 consolidated statements of operations as operating expenses.

Current federal income taxes (payable) receivable totaled $2.5 million and $(.7) million at December 31, 2007 and 2006, 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,
	2007			2006
	(In thousands)

Deferred tax liabilities:
Deferred policy acquisition costs	$	1,796		$	885
Present value of future profits of acquired business		2,174			2,510
Deferred and uncollected premium		68			81
Reinsurance receivables		1,992			1,717
Prepaid expenses		1,730			1,538
Other taxable temporary differences		325			312
Total deferred tax liabilities		8,085			7,043

Deferred tax assets:
Policy reserves		1,609			2,124
Net operating loss carry forward		12,508			11,205
Unrealized loss on securities		1,342			2,842
Stock options		123			-
Separate accounts		293			293
Pension liability		1,684			2,088
Other deductible temporary differences		2,878			2,683
Total deferred tax assets		20,437			21,235
Valuation allowance		(12,058	)		(12,301	)
Net deferred tax assets		8,379			8,934

Net deferred tax assets	$	(294	)	$	(1,891	)

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, 2007, was $12.6 million, of which $4.4 million would be due if the entire balance is distributed at a tax rate of 35%.

F-28

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, 2007, Investors Life has approximately $165.5 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.

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $1,441,000 increase in the liability for unrecognized tax benefits and a $1,186,000 increase in deferred tax assets offset by a $931,000 increase in the valuation allowance for deferred tax assets, resulting in a $1,186,000 reduction to the January 1, 2007 balance of retained earnings. The Company also reclassified to the liability for unrecognized tax benefits at adoption $3,522,000 of current tax liabilities (previously recorded as a reduction to current tax receivables) and $503,000 of deferred tax liabilities for a total unrecognized tax benefit liability of $5,466,000. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest of $750,000, is as follows:

	Liability for
	Unrecognized
	Tax Benefits
	(In thousands)

Balance at January 1, 2007	$	4,717
Reductions for tax positions of prior years		-
Additions for tax positions of prior years		155
Additions for tax positions of the current tax year		15
Decreases related to settlements with the taxing authorities		-
Reductions as a result of the lapse of the statute of limitations		(5	)

Balance at December 31, 2007	$	4,882

The statute of limitations related to the consolidated Federal income tax return and the separate tax returns of ILG Securities and Investors Life are closed for all tax years up to and including 2003. Due in part to the Company’s net operating loss carryforward position, the Company’s closed tax years can be examined for the purpose of reducing net operating losses and other tax attributes generated in closed years but carried forward to open tax years. The expiration of the statute of limitations related to the various state income tax returns that the Company and subsidiaries file, varies by state. The Company’s Federal tax returns and any significant state tax returns are not currently under examination.

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $4.9 million at December 31, 2007.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The liability for unrecognized tax benefits included accrued interest of $0.6 million and $0.8 million at December 31, 2007 and January 1, 2007, respectively.

At December 31, 2007, the Company had nonlife net operating loss carry forwards of approximately $35.3 million, which will begin to expire in 2008. Approximately $33.4 million of these loss carry forwards are not scheduled to expire until years 2018 through 2027 and $29.3 million is available to offset taxable income of members of the FIC group excluding Investors Life. The Company has life net operating loss deduction carryforwards of approximately $1.5 million, which will begin to expire in 2019.

The Company has a valuation allowance of $12.1 million as of December 31, 2007 and 12.3 million as of December 31, 2006. The decrease in the valuation allowance in 2007 is composed of a $931,000 increase related to the adoption of FIN 48 at January 1, 2007, offset by a $1.2 million decrease during 2007. Of the $1.2 million decrease during 2007, the amount of the decrease allocated to continuing operations and other comprehensive income was $1.1 million and $0.1 million, respectively. The Company recorded an increase to the valuation allowance of $2.1 million during 2006. Of the $2.1 million increase in 2006, the amount of the increase (decrease) allocated to continuing operations, discontinued operations, and other comprehensive income was $2.0 million, $0.5 million, and $(0.4) million respectively.

F-29

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 $12.1 million and $12.3 million as of December 31, 2007 and 2006, respectively. Management has determined, primarily due to the Company’s cumulative loss position over the past three years and significant limitations prescribed by the Internal Revenue Code, that it is more likely than not that a portion of the deferred tax assets will not be realized through reductions of future taxes. Specifically, the Internal Revenue Code limits the yearly utilization of nonlife deferred tax assets against life insurance deferred tax liabilities. The valuation allowance has been established primarily against the portion of the nonlife deferred tax assets that have expiration dates prior to which those deferred assets could be utilized against life insurance deferred tax liabilities. These deferred tax assets are mainly comprised of the nonlife net operating losses described above. As previously disclosed in Note 2, during 2006 the Company sold one of its life insurance subsidiaries which had significant net deferred tax liabilities. These deferred tax liabilities were used, in part, to support the conclusion that a portion of the Company’s beginning of year nonlife net deferred tax asset was more likely than not to be realized. The sale of this subsidiary and its net deferred tax liabilities was a change in circumstances that caused a change in judgment about the realization of the nonlife deferred tax assets in future years. As a result, management determined that it was more likely than not, based on the weight of the available evidence, that an additional $1.5 million valuation allowance was needed at December 31, 2006 against the beginning of year deferred tax assets previously supported by the life insurance subsidiary’s deferred tax liabilities. This increase in the valuation allowance was part of the $2.0 million increase in valuation allowance from continuing operations during 2006.

9. Reinsurance

Investors Life reinsures 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.

Total life insurance in force was $3.5 billion and $3.8 billion at December 31, 2007 and 2006, respectively. Of these amounts, life insurance in force totaling $444 million and $409 million was ceded to reinsurance companies. Reinsurance contracts are primarily on a yearly renewable term basis representing 74.6% and 65.0% of ceded life insurance in force at December 31, 2007 and 2006, respectively. Investors Life maintains reinsurance treaties under which it reinsures all of the mortality risks under accidental death benefit policies, and substantially all of the contractual obligations and risks under accident and health and disability income policies.

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,
	2007		2006
	(In thousands)

Receivable related to modified coinsurance agreement	$	20,565	$	23,771
Future policy benefits ceded		3,193		2,865
Other reinsurance recoverables		2,575		1,527
Other policy claims and benefits		1,177		898

Total reinsurance receivables	$	27,510	$	29,061

F-30

The amounts in the consolidated statements of operations have been reduced by reinsurance ceded as follows:

	Year Ended December 31,
	2007		2006		2005
	(In thousands)

Premiums	$	734	$	717	$	1,754

Policyholder benefits and expenses	$	705	$	1,193	$	1,818

Estimated amounts recoverable from reinsurers on paid claims are $577,000 and $238,000 in 2007 and 2006, respectively. These amounts are included in reinsurance receivables in the consolidated financial statements at December 31, 2007 and 2006.

10. Shareholders’ Equity

Dividend Restrictions

On March 18, 2004, Investors Life was re-domesticated to the State of Texas. Accordingly, the ability to pay dividends by this insurance company 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 Investors Life or Family Life in 2007, 2006 or 2005. Pursuant to statutory limitations, the maximum dividend payment which could be made by Investors Life in 2008, without the prior approval of the TDI is approximately $4.1 million.

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 Investors Life at December 31, 2007 and 2006 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 2007 and 2006 Investors Life had four ratios which were outside the usual ranges, which were primarily related to changes in investment income and changes in premium, product mix, and reserving. The ratios were outside the usual ranges primarily due to a recapture of ceded reinsurance by Family Life from Investors Life during 2006. This recapture occurred prior to the sale of Family Life. For statutory accounting purposes, the recapture affected premium income and change in policy reserves which caused ratios to fall outside the usual ranges in both 2006 and 2007. Excluding the effects of the reinsurance recapture, Investors Life would have had one ratio outside the usual ranges, which related to investment income. Investors Life continues to maintain capital and surplus positions which significantly exceed risk-based capital (“RBC”) and other regulatory requirements.

Capital and Surplus of Insurance Company

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, 2007 and 2006, was $47.8 million and $43.0 million, respectively. Statutory net income was $3.9 million, $5.6 million, and $10.7 million for the years ended December 31, 2007, 2006, and 2005, respectively.

F-31

Investors Life prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the State of Texas. The prescribed or permitted accounting practices for Texas differs in certain instances from the NAIC Accounting Practices and Procedures Manual (“NAIC SAP”). As of December 31, 2007 and 2006, Investors Life utilized no accounting practices which differed from NAIC SAP. As a result, there were no differences in statutory capital and surplus between NAIC SAP and practices prescribed by the State of Texas.

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.

As more fully described in Note 2, the Company completed the sale of its wholly owned subsidiary, Family Life, as of December 29, 2006. Prior to the closing of the sale, the Family Life Pension Plan, along with its assets and liabilities, was transferred from Family Life to its upstream parent company and all current and future obligations of the Family Life Pension Plan remain the responsibility of the Company. The Family Life Pension Plan continues to be known as such.

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.

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.

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.

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, 2007 and 2006, 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. 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.

Settlements occurred on September 30, 2006 and December 31, 2007, 2006 and 2005 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 settlements resulted in the recognition of charges to expense totaling $182,000, $433,000 and $361,000 for 2007, 2006 and 2005, respectively.

F-32

On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, (“SFAS No. 158”). SFAS No. 158 required the Company to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of its pension plan in its December 31, 2006 consolidated financial statements, with a corresponding adjustment to accumulated other comprehensive income, net of tax, eliminating the minimum pension liability provision of SFAS No. 87. However, as the plan has been frozen as of December 31, 2005, there is no effect of this adoption on the consolidated financial statements of the Company as the funded status based on accumulated benefit obligation (calculated under the provisions of SFAS No. 87) and the funded status based on projected benefit obligation (calculated under the provisions of SFAS No. 158) remain the same. Any actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as net periodic pension cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of SFAS No. 158.

The pension costs for the Family Life Pension Plan include the following components:

	Year Ended December 31,
	2007			2006			2005
	(In thousands)

Service cost for benefits earned during the year	$	-		$	-		$	-
Interest cost on projected benefit obligation		416			440			464
Expected return on plan assets		(425	)		(412	)		(405	)
Amortization of unrecognized prior service cost		-			-			-
Amortization of unrecognized (gains) losses		67			90			105
Recognition of net loss due to settlement		182			433			361

Net periodic benefit cost	$	240		$	551		$	525

Weighted-average assumptions used to determine net periodic benefit cost:

	Year Ended December 31,
	2007			2006			2005

Discount rate		5.63	%		5.25	%		5.25	%
Expected long-term return on plan assets		7.25	%		7.25	%		7.25	%
Rate of compensation increase		N/A			N/A			N/A

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.

F-33

The following summarizes the obligations and funded status of the Family Life Pension Plan:

	December 31,
	2007			2006
	(In thousands)

Change in benefit obligation:
Benefit obligation at beginning of year	$	7,640		$	8,970
Service cost		-			-
Interest cost		416			440
Benefits paid		(132	)		(121	)
Liability actuarial gain		(169	)		(580	)
Annual lump sum distribution or other expected settlements		(522	)		(1,069	)
Benefit obligation at end of year		7,233			7,640

Change in plan assets:
Fair value of plan assets at beginning of year		5,945			5,655
Actual return on plan assets		379			556
Employer contributions		441			924
Benefits paid		(132	)		(121	)
Annual lump sum distribution or other expected settlements		(522	)		(1,069	)
Fair value of plan assets at end of year		6,111			5,945

Funded status at end of year	$	(1,122	)	$	(1,695	)

Amounts recognized in the Company's consolidated financial statements:
Assets	$	-		$	-
Liabilities (included in "other liabilities")		(1,122	)		(1,695	)

Net amount recognized	$	(1,122	)	$	(1,695	)

Amounts recognized in accumulated other comprehensive income:
Net loss	$	2,520		$	2,893
Prior service cost		-			-

Net amount recognized	$	2,520		$	2,893

	December 31,
	2007		2006
	(In thousands)

Projected benefit obligation	$	7,233	$	7,640
Accumulated benefit obligation	$	7,233	$	7,640
Fair value of plan assets	$	6,111	$	5,945

Weighted average assumptions used to determine benefit obligations:

	December 31,
	2007			2006

Discount rate		5.96	%		5.63	%
Rate of compensation increase		N/A			N/A

The actuarial loss included in accumulated other comprehensive income and expected to be recognized in net periodic pension cost during the year ended December 31, 2008 is $58,000, before taxes.

F-34

The plan’s asset allocations are as follows:

	December 31,
	2007			2006

Equity securities		44	%		56	%
Debt securities		31	%		37	%
Cash and cash equivalents		25	%		7	%

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. The plan’s targeted asset allocation under its investment policy is as follows: equities – 45% to 55%; debt securities – 40% to 50%; and cash and cash equivalents – 5% to 15%.

The estimated contribution to the plan for 2008 is $350,000. No plan assets are expected to be returned to the Company during the year ended December 31, 2008.

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)

2008	$	1,019
2009	$	1,559
2010	$	350
2011	$	783
2012	$	707
Years 2013 through 2017	$	1,944

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 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, 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). Additionally, a curtailment occurred on December 31, 2005 when the decision was made to amend the plan to freeze accrued benefits for Rule of 68 NHCEs, effective March 31, 2006. Because the plan’s unrecognized losses exceeded the decrease in PBO caused by the curtailment on December 31, 2005, the SFAS No. 88 curtailment charge recognized in the 2005 expense was zero. Because all plan participants’ accrued benefits are now frozen, there will be no additional curtailments under this plan in the future.

F-35

On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158. SFAS No. 158 required the Company to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of its pension plan in its December 31, 2006 consolidated financial statements, with a corresponding adjustment to accumulated other comprehensive income, net of tax, eliminating the minimum pension liability provision of SFAS No. 87 The adjustment to accumulated other comprehensive income at adoption of $3,250,000 represents the net unrecognized actuarial losses prior to the adoption of SFAS No. 158 , which were previously netted against the plan’s funded status in the Company’s consolidated financial statements pursuant to the provisions of SFAS No. 87. These amounts will be subsequently recognized as net periodic pension cost pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as net periodic pension cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of SFAS No. 158.

The incremental effect of applying SFAS No. 158 on individual line items in the accompanying consolidated balance sheet at December 31, 2006 is described below:

	Before						After
	Implementation			Implementation			Implementation
	of SFAS 158			Adjustments			of SFAS 158
	(In thousands)

Assets for pension benefits	$	3,358		$	(3,250	)	$	108
Deferred income taxes		801			1,090			1,891
Total assets		1,040,471			(2,160	)		1,038,311
Accumulated other comprehensive income (loss)		(7,426	)		(2,160	)		(9,586	)
Total shareholders' equity		62,841			(2,160	)		60,681

The pension costs for the ILCO Pension Plan include the following components:

	Year Ended December 31,
	2007			2006			2005
	(In thousands)

Service cost for benefits earned during the period	$	-		$	15		$	46
Interest cost on projected benefit obligation		1,070			1,048			1,047
Expected return on plan assets		(1,493	)		(1,400	)		(1,379	)
Amortization of unrecognized (gains) losses		77			184			136
Amortization of unrecognized prior service cost		-			-			-

Net periodic benefit cost	$	(346	)	$	(153	)	$	(150	)

Weighted-average assumptions used to determine net periodic benefit cost:

	Year Ended December 31,
	2007			2006			2005

Discount rate		5.80	%		5.50	%		5.75	%
Expected long-term return on plan assets		8.00	%		8.00	%		8.00	%
Rate of compensation increase		N/A			3.75	%		3.75	%

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The following summarizes the obligations and funded status of the ILCO Pension Plan:

	December 31,
	2007			2006
	(In thousands)

Change in benefit obligation:
Benefit obligation at beginning of period	$	19,199		$	19,334
Service cost		-			15
Interest cost		1,070			1,048
Benefits paid		(995	)		(890	)
(Gain) loss due to experience		(1,141	)		(308	)
Benefit obligation at end of year		18,133			19,199

Change in plan assets:
Fair value of plan assets at beginning of year		19,307			18,106
Actual return on plan assets		1,093			2,091
Employer contributions		-			-
Benefits paid		(995	)		(890	)
Fair value of plan assets at end of year		19,405			19,307

Funded status at end of year	$	1,272		$	108

Amounts recognized in the Company's consolidated financial statements:
Assets (included in "other assets")	$	1,272		$	108
Liabilities		-			-

Net amount recognized	$	1,272		$	108

Amounts recognized in accumulated other comprehensive income:
Net loss	$	2,432		$	3,250
Prior service cost		-			-

Net amount recognized	$	2,432		$	3,250

	December 31,
	2007		2006
	(In thousands)

Projected benefit obligation	$	18,133	$	19,199
Accumulated benefit obligation	$	18,133	$	19,199
Fair value of plan assets	$	19,405	$	19,307

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Weighted average assumptions used to determine benefit obligations:

	Year Ended December 31,
	2007			2006

Discount rate		6.32	%		5.80	%
Rate of compensation increase		N/A			N/A

The actuarial loss included in accumulated other comprehensive income and expected to be recognized in net periodic pension cost during the year ended December 31, 2008 is $33,000, before taxes.

The plan’s asset allocations are as follows:

	December 31,
	2007			2006

Equity securities		54	%		65	%
Debt securities		18	%		25	%
Cash and cash equivalents		28	%		10	%

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. The plan’s targeted asset allocation under its investment policy is as follows: equities – 55% to 65%; debt securities – 30% to 40%; and cash and cash equivalents – 5% to 15%.

The estimated minimum contribution to the plan for 2008 is zero. No plan assets are expected to be returned to the Company during the year ending December 31, 2008.

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)

2008	$	1,288
2009	$	1,311
2010	$	1,301
2011	$	1,327
2012	$	1,301
Years 2013 through 2017	$	6,604

Savings and Investment Plan

ILCO maintains a savings and investment plan (“401(k) Plan”) for eligible employees. The 401(k) Plan allows eligible employees who have met the eligibility waiting period to make contributions to the 401(k) Plan on a tax deferred basis, and in 2006 provides for a matching contribution by participating companies. The match, which is in the form of cash, is equal to 100% of an eligible participant’s elective deferral contributions, as defined by the 401(k) Plan, not to exceed 2% of the participant’s plan compensation.

Effective January, 1, 2006, the 401(k) Plan was amended to add the provision whereby the employer discontinued all contributions under Section 4.1(b), including the Safe Harbor Non-elective Contributions set forth in Appendix A to the Plan. Further, employer matching contributions will be made in the form of cash instead of FIC common stock on an annual basis instead of a quarterly basis. Allocations are made to the accounts of participants who were actively at work at the end of the calendar year. For the plan year beginning January 1, 2007, the employer contribution will be made on a discretionary basis. Vesting benefits of employer contributions are made on number of years of service.

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In 2006 and later, a participant may elect to contribute up to 75% of eligible earnings on a tax deferred basis, including the maximum permissible catch-up deferral amounts for age 50 or older and, subject to limitations applicable to “highly compensated employees,” as defined by the Internal Revenue Code. Plan participants may allocate contributions, and earnings thereon, between several investment options. The Account Balance of each participant attributable to employee contributions is 100% vested at all times. Vesting of benefits attributable to employer contributions is based on years of service. The contribution costs recognized by the Company relating to the 401(k) Plan totaled $65,000, $0, and $445,000, for the years ended December 31, 2007, 2006, and 2005, respectively. For 2007 and 2006, Company contributions totaling $107,000 and $144,000 were funded through forfeited non-vested participant balances.

The 401(k) Plan accounts for employees who participated in prior plans of the Company or one of its affiliates and may include the following prior plan accounts:

Prior Plan After-tax Account

Transferred ESOP Account or

ESOP Diversification Account

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. No contributions were made to the ESOP Plan in 2007, 2006, or 2005. At December 31, 2007, the 401(k) Plan had a total of 187,265 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.

FIC Stock Option Compensation

On December 31, 2007 FIC had two stock option plans, the 2004 Incentive Stock Plan and the Stock Option Plan for Non-Employee Directors. On July 29, 2007, the Company’s annual meeting of shareholders was held and the shareholders of the Company approved both stock option plans. Additionally, the Company issued stock options to its Chief Executive Officer, William Prouty which are not classified under either plan and are described below. In aggregate, the Company issued 500,000 stock options to its directors, employees and Chief Executive Officer during the year ended December 31, 2007.

SFAS No. 123(R) permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. The Company applied the “modified prospective” method, under which compensation cost is recognized in the financial statements beginning with the adoption date for all share-based payments granted after that date, and for all unvested awards granted prior to the adoption date of SFAS No. 123(R). The Company did not have any outstanding options for the years ended December 31, 2006 and 2005.

On January 1, 2007, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) is a revision of SFAS No. 123 and supersedes APB No 25. Among other items, SFAS No. 123(R) eliminated the use of APB No. 25 and the intrinsic value method of accounting, and requires the Company to recognize in the financial statements, the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards. To measure the fair value of stock options granted to employees, the Company currently utilizes the Black-Scholes-Merton option-pricing model, consistent with the method used for pro forma disclosures under SFAS No. 123.

FIC entered into a stock option agreement on February 1, 2007 with its Chief Executive Officer, William Prouty, pursuant to which Mr. Prouty was issued an option to purchase 150,000 shares of the common stock of FIC at a price of $7.45 per share. The grant date fair value of the options granted was $1.27 per share. Fifty percent (50%) of the option vested on February 1, 2007, and the remaining fifty percent (50%) vested on June 21, 2007 and are all exercisable and had $0 intrinsic value at December 31, 2007. The Company recognized $190,000 in share based compensation expense related to this grant for the year ended December 31, 2007. (see Note 17 “Related Party Transactions”). The option expires on June 21, 2009 and the contract term remaining is 1.47 years. Because Mr. Prouty’s option was issued as an inducement material to his entering into employment with FIC, the option was issued outside of FIC’s 2004 Incentive Stock Plan.

The Company’s annual meeting of shareholders was held on June 29, 2007 at which time the shareholders of the Company approved the 2004 Incentive Stock Plan, designed to attract, retain and reward key employees, as well as the Stock Option Plan for Non-Employee Directors. Subject to adjustments for defined changes in capital stock, the total number of shares of common stock reserved and available for grant under the 2004 Incentive Stock Plan is 500,000. In accordance with the terms of the 2004 Incentive Stock Plan, 150,000 stock option awards were granted to certain executives and employees of the Company during 2007. The options vest in either three or four years, and have a ten year term.

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Subject to adjustments for defined changes in capital stock, the total number of shares of common stock reserved and available for grant under the Stock Option Plan for Non-Employee Directors is 400,000. In accordance with the terms of the Stock Option Plan for Non-Employee Directors, 200,000 stock option awards were granted to eligible members of the Company’s Board of Directors in 2007. The options vest and are exercisable in three equal annual installments beginning with the first anniversary of the date on which the option was granted, and have a ten year term.

The fair value of the option awards were estimated on the date of grant using a Black-Scholes-Merton option pricing model. Total pre-tax share-based compensation for the years ended 2007, 2006 and 2005 was $363,000, $0 and $0 respectively. The total deferred income tax benefit recognized for share-based compensation arrangements was $0 for each of the years ended December 31, 2007, 2006 and 2005, respectively. In accordance with SFAS No. 123 (R), the share-based compensation is recognized over the period during which an employee is required to provide service in exchange for the award, the requisite service period, which is usually the vesting period.

There were no stock option exercises for the years ended December 31, 2007, 2006 and 2005, respectively. No cash was received from options exercised from all share based arrangements and no actual tax benefits realized from any option exercises during these periods. Option exercises in the future may be satisfied from treasury shares or from new share issuances.

Significant assumptions used in the calculation of fair value for each option award in the year ended December 31, 2007 are as follows:

	2004 Incentive Stock Plan	Stock Option Plan for Non-Employee Directors

Expected term of options	6 years to 6.25 years	6 years
Expected volatility:
Range	22.5% to 23.7%	22.3% to 22.5%
Weighted Average	22.7%	22.4%
Expected dividends	-	-
Risk free rate:
Range	3.4% to 4.0%	4.3% to 4.9%
Weighted Average	4.0%	4.6%

The Black-Scholes-Merton model incorporates various assumptions, including expected volatility, expected life, and risk-free interest rates. The expected term is derived using a simplified method calculation as defined in SEC Staff Accounting Bulletin No. 107, for “plain vanilla” options as that term is further defined in the bulletin, and represents the period of time that the options are expected to be outstanding. Volatility is a measure of the amount by which a financial variable, such as share price, has fluctuated or is expected to fluctuate during a period. The calculated volatility was derived from the option pricing model utilizing FIC historical share price data. The dividend yield is assumed to be zero, since FIC has not paid dividends since 2003, and management does not anticipate the payment of such dividends in the near future. In accordance with SFAS 123R, the risk-free discount rate approximates the rate currently available on federal government zero-coupon bonds with a remaining term equal to the options expected life. The estimated annualized forfeiture rate applied for the year ended December 31, 2007 was 4%.

F-40

Summary information regarding the 2004 Incentive Stock Plan is as follows:

	Shares Available for Grant			Shares Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

Balance at January 1, 2007		-			-			-
Plan implementation		500,000
Shares awarded under separation agreement (1)		(60,000	)
Stock options:
Awarded		(150,000	)		150,000		$	6.63
Exercised		-			-			-
Forfeited		20,000			(20,000	)		5.88
Cancelled/expired		-			-			-


Balance at December 31, 2007		310,000			130,000		$	6.75		9.02	$	19,000

Exercisable at December 31, 2007					25,000		$	10.35		6.64	$	-

(1) Share grant issued to former Chief Executive Officer pursuant to terms of separation agreement as described below.

The weighted-average grant-date fair value of options granted under the 2004 Incentive Stock Plan during 2007 was $2.10. There were no option awards during 2006 and 2005. There were no options exercised during the years ended December 31, 2007, 2006, and 2005.

A summary of the status FIC’s 2004 Incentive Stock Plan nonvested shares at December 31, 2007 and changes in status for the year ended December 31, 2007 is presented below:

Nonvested Shares	Shares			Weighted Average Grant Date Fair Value

Nonvested at January 1, 2007		-		$	-
Granted		150,000			2.10
Vested		(25,000	)		3.29
Forfeited		(20,000	)		1.86


Nonvested at December 31, 2007		105,000		$	1.86

As of December 31, 2007, there was approximately $200,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2004 Incentive Stock Plan. This cost is expected to be recognized over a weighted average period of 2.7 years. The total fair value of 2004 Incentive Stock Plan shares vested for the years ended December 31, 2007, 2006 and 2005 was approximately $82,000, $0 and $0 respectively.

F-41

In connection with the election of Mr. J. Bruce 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 2004 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, under the terms of his Separation Agreement, FIC agreed to issue 60,000 shares of its common stock to Mr. Boisture on or before June 30, 2007, provided that the Incentive Stock Plan was approved by the shareholders of FIC. In the event such approval had not been obtained by June 30, 2007, Mr. Boisture would have received a cash payment of $465,000, less applicable tax withholding. The Company’s annual meeting of shareholders was held on June 29, 2007 at which time the shareholders of the Company approved the 2004 Incentive Stock Plan. Accordingly, at June 30, 2007 FIC reserved 60,000 shares out of the 2004 Incentive Stock Plan related to this agreement. The Company completed the transaction and disbursed the shares in the third quarter of 2007. Compensation cost of $465,000 related to this Separation Agreement was accrued in the Company’s consolidated financial statements at December 31, 2005. Based on the closing share price upon shareholder approval of the 2004 Incentive Stock Plan on June 29, 2007, the Company reduced this accrual to $354,000 in the second quarter 2007. In accordance with SFAS No. 128 “Earnings Per Share”, these shares were deemed to no longer be contingently issuable shares as of June 30, 2007 since there were no circumstances under which the shares would not be issued, and accordingly the 60,000 shares were considered outstanding and reflected in the calculation of basic earnings per share for the period ended June 30, 2007.

Summary information regarding the Stock Option Plan For Non-Employee Directors is as follows:

	Shares Available for Grant			Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

Balance at January 1, 2007		-			-		-
Plan implementation		400,000
Stock options:
Awarded		(200,000	)		200,000	$	5.98
Exercised		-			-		-
Forfeited		-			-		-
Cancelled/expired		-			-		-


Balance at December 31, 2007		200,000			200,000	$	5.98		9.53	$	-

Exercisable at December 31, 2007					-	$	-		-	$	-

The weighted-average grant-date fair value of options granted under the Stock Option Plan for Non-Employee Directors during 2007 was $2.03. There were no option awards during 2006 and 2005. There were no options exercised during the years ended December 31, 2007, 2006, and 2005.

A summary of the status of FIC’s Stock Option Plan for Non-Employee Directors nonvested shares at December 31, 2007 and changes in status for the year ended December 31, 2007 is presented below:

F-42

	Shares		Weighted Average Grant Date Fair Value

Nonvested at January 1, 2007		-	$	-
Granted		200,000		2.03
Vested		-		-
Forfeited		-		-


Nonvested at December 31, 2007		200,000	$	2.03

As of December 31, 2007, there was approximately $341,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Option Plan for Non-Employee Directors. This cost is expected to be recognized over a weighted average period of 2.5 years. The total fair value of 2004 Stock Option Plan for Non-Employee Directors shares vested for the each of the years ended 2007, 2006 and 2005 was $0.

12. Lease Commitments

In conjunction with the sale of River Place Pointe on June 1, 2005, the Company entered into a lease agreement with the buyer for approximately 76,000 square feet in Building One. The agreement has 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 notified the lessor of its intent to cancel the lease as of March 31, 2008 pursuant to the agreement. Subsequent to this notification, the Company and the lessor entered into an amended lease agreement extending the lease term through March 31, 2009.

The Company and its subsidiaries have entered into other lease agreements for records storage space and equipment which expire at various dates through August 2010.

The Company recorded rent expenses of $2,278,000, $2,069,000, and $2,019,000 in 2007, 2006, and 2005, respectively. At December 31, 2007, minimum annual rentals under non-cancellable leases before considering subleases are as follows (in thousands):

2008	$	2,572
2009		869
2010		169
Thereafter		-

Total	$	3,610

The Company has non-cancellable subleases of the Company-occupied facilities above. Payments to be received under these subleases will total $221,000 in 2008 and $48,000 in 2009.

13. Commitments and Contingencies

The Manhattan Life Insurance Company and Family Life Insurance Company v. Family Life Corporation, Investors Life Insurance Company of North America and FIC Insurance Services, L.P.

F-43

In the opinion of the Company’s management, it is not currently possible to estimate the impact, if any, that the ultimate resolution of this legal proceeding will have on the Company’s results of operations, financial position or cash flows. Accordingly, no accrual for possible losses has been recorded in the accompanying consolidated financial statements for this legal proceeding.

Equita Financial and Insurance Services of Texas, Inc. and M&W Insurance Services, Inc. v. Financial Industries Corporation

T. David Porter v. Financial Industries Corporation

Other Litigation

F-44

Sale of Family Life

FIC, through its wholly owned subsidiary, Family Life Corporation, entered into a definitive agreement on December 8, 2006 for the sale of its wholly owned insurance subsidiary, Family Life, to Manhattan Life for $28.0 million in cash, subject to certain post-closing adjustments. The sale of Family Life was completed on December 29, 2006.

Pursuant to the terms and subject to the limitations contained in the sale agreement, Family Life Corporation agreed to indemnify Manhattan Life against all losses incurred by Manhattan Life that are caused by a breach of any of the representations, warranties, covenants or other agreements made by Family Life Corporation in the sale agreement. As described above, Manhattan Life filed suit against the Company on April 17, 2007 claiming that the Company has breached the non-competition provision contained in the sale agreement, and Manhattan Life may file additional indemnification claims in the future. We cannot estimate the amount that the Company may be required to pay to Manhattan Life if it is successful in its pending lawsuit, nor can we estimate the likelihood or amount of future claims under the sale agreement.

14. Earnings Per Share

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

	Year Ended December 31,
	2007		2006		2005
	(In thousands, except per share amounts)
Numerator:

Income from continuing operations	$	3,596	$	715	$	942

Denominator:
Weighted average common shares outstanding:
Basic		10,241		9,863		9,821
Common stock options		73		-		-

Diluted		10,314		9,863		9,821

Per share:
Basic	$	0.35	$	0.07	$	0.09
Diluted	$	0.35	$	0.07	$	0.09

At December 31, 2007, options to purchase approximately 114,000 weighted average shares of common stock at exercise prices ranging from $7.45 to $13.25 per share were outstanding, but not included in the computation of diluted earnings per share due to their antidilutive effect. There were no options outstanding at the periods ended December 31, 2006 and 2005, respectively.

15. Business Concentration

Investors Life markets individual traditional life, mortgage protection life, universal life, and annuity products in 49 states, the District of Columbia, and the U.S. Virgin Islands with concentrations of approximately 12%, 8%, 7%, and 7% in Pennsylvania, California, New Jersey, and Ohio, respectively, for 2007. For 2006, these concentrations were 12%, 8%, 8%, and 7% in Pennsylvania, California, New Jersey, and Ohio, respectively.

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16. Quarterly Financial Data (Unaudited)

Unaudited quarterly financial data for 2007 and 2006 is provided below:

	Three Months Ended
	March 31,
	2007		2006
	(In thousands, except per share data)

Total revenues	$	20,622	$	17,387

Income (loss) from continuing operations	$	542	$	(1,217	)
Discontinued operations		-		(569	)
Net income (loss)	$	542	$	(1,786	)

Basic earnings per share:

Income (loss) from continuing operations	$	0.05	$	(0.12	)
Discontinued operations		-		(0.06	)
Net income (loss)	$	0.05	$	(0.18	)

Diluted earnings per share:

Income (loss) from continuing operations	$	0.05	$	(0.12	)
Discontinued operations		-		(0.06	)
Net income (loss)	$	0.05	$	(0.18	)

	Three Months Ended
	June 30,
	2007		2006
	(In thousands, except per share data)

Total revenues	$	18,440	$	18,295

Income from continuing operations	$	77	$	1,008
Discontinued operations		-		733
Net income	$	77	$	1,741

Basic earnings per share:

Income from continuing operations	$	0.01	$	0.10
Discontinued operations		-		0.08
Net income	$	0.01	$	0.18

Diluted earnings per share:

Income from continuing operations	$	0.01	$	0.10
Discontinued operations		-		0.08
Net income	$	0.01	$	0.18

F-46

	Three Months Ended
	September 30,
	2007		2006
	(In thousands, except per share data)

Total revenues	$	19,767	$	18,143

Income from continuing operations	$	1,587	$	1,611
Discontinued operations		-		(316	)
Net income	$	1,587	$	1,295

Basic earnings per share:

Income from continuing operations	$	0.15	$	0.16
Discontinued operations		-		(0.03	)
Net income	$	0.15	$	0.13

Diluted earnings per share:

Income from continuing operations	$	0.15	$	0.16
Discontinued operations		-		(0.03	)
Net income	$	0.15	$	0.13

	Three Months Ended December 31,
	2007		2006
	(In thousands, except per share data)

Total revenues	$	18,032	$	18,588

Income (loss) from continuing operations	$	1,390	$	(687	)
Discontinued operations		-		(25,345	)
Net income (loss)	$	1,390	$	(26,032	)

Basic earnings per share:

Income (loss) from continuing operations	$	0.14	$	(0.07	)
Discontinued operations		-		(2.56	)
Net income (loss)	$	0.14	$	(2.63	)

Diluted earnings per share:

Income (loss) from continuing operations	$	0.14	$	(0.07	)
Discontinued operations		-		(2.56	)
Net income (loss)	$	0.14	$	(2.63	)

F-47

17. Related Party Transactions

FIC entered into an Engagement Letter (the "Engagement Letter"), dated February 1, 2007, between FIC and DLB Capital Fund FNIN, LLC ("DLB"), pursuant to which FIC agreed to pay DLB $439,996 for management consulting services over the term of the Engagement Letter, which shall terminate on January 31, 2008, unless terminated earlier in accordance with the Engagement Letter. DLB is a Wilton, Connecticut based private equity firm focusing primarily on the financial services sector. The group was formed to specialize in management buyouts, corporate divestitures, leveraged buyouts, re-capitalizations and public to private transactions. At the effective date of the Engagement Letter, William Prouty had a business relationship with DLB but he no longer maintains any affiliation with DLB. For the year ended December 31, 2007, FIC has incurred expenses totaling $421,659 under this agreement, including payments of $366,660. The agreement terminated on January 31, 2008 pursuant to the terms of the Engagement Letter.

18. Subsequent Events

On January 14, 2008, following the unanimous approval of its Board of Directors, FIC entered into a definitive agreement providing for the merger of the Company with an indirect, wholly-owned subsidiary of Americo Life, Inc., (“Americo”). In the merger, each outstanding share of FIC’s common stock, par value $0.20 per share (other than those shares held by Americo, FIC, any of their respective subsidiaries or any shareholders who perfect appraisal rights under Texas law) will be converted into the right to receive cash in the amount of $7.25, subject to downward adjustment in the event there is an increase in the number of fully-diluted shares of common stock in excess of a specified threshold. Following the merger, FIC will become an indirect, wholly-owned subsidiary of Americo. The merger is subject to customary regulatory approvals, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (which was obtained on February 25, 2008) and the approval of the Texas Department of Insurance, as well as other customary conditions for similar transactions, including the approval of the shareholders of FIC pursuant to Texas law. The merger is expected to close in the second quarter of 2008.

Additionally, on January 31, 2008, the Company determined that it would immediately cease underwriting new policies. In doing so, FIC terminated its agreements with certain independent insurance agents. FIC will continue to manage its existing block of insurance policies and will continue to earn commissions on policies sold by agents appointed with its subsidiary, ILG Sales Corporation, under marketing agreements with unrelated insurance companies.

F-48

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

SCHEDULE I – SUMMARY OF INVESTMENTS – OTHER THAN

INVESTMENTS IN RELATED PARTIES

	December 31, 2007
					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	$	34,608	$	35,007	$	35,007
States, municipalities and political subdivisions		19,666		19,122		19,122
Corporate		338,904		336,467		336,467
Mortgage-backed and asset-backed		114,799		108,678		108,678
Total fixed maturity securities		507,977		499,274		499,274

Equity securities		7,474		9,573		9,573
Policy loans		27,959		33,801		27,959
Short-term investments		-		-		-

Total investments	$	543,410	$	542,648	$	536,806

F-49

FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)

SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS

	December 31,
	2007			2006
	(In thousands)

ASSETS

Cash and cash equivalents	$	262		$	305
Investments in subsidiaries*		97,867			89,614
Intercompany receivables*		3,278			5,240
Accounts receivable		254			94
Other assets		629			647

Total assets	$	102,290		$	95,900

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Notes payable**	$	15,000		$	15,000
Other liabilities		1,064			1,448
Total liabilities		16,064			16,448

Shareholders’ equity:
Common stock, $.20 par value, 25,000,000 shares authorized in 2007 and 2006; 12,533,798 and 12,533,402 shares issued in 2007 and 2006; 10,240,896 and 10,210,385 shares outstanding in 2007 and 2006		2,507			2,507
Additional paid-in capital		70,174			70,046
Accumulated other comprehensive loss		(5,761	)		(9,586	)
Retained earnings (including $96,264,000 and $90,396,000 of undistributed earnings of subsidiaries at December 31, 2007 and 2006)		20,113			17,703
Treasury stock, at cost, 291,112 and 343,738 shares in 2007 and 2006***		(807	)		(1,218	)
Total shareholders’ equity		86,226			79,452

Total liabilities and shareholders’ equity	$	102,290		$	95,900

* Eliminated in consolidation in 2007 and 2006.

** See Note 7 to consolidated financial statements.

*** Excludes $18.8 million of FIC stock owned by subsidiaries at December 31, 2007 and 2006.

F-50

FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)

SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2007			2006			2005
	(In thousands)

Income	$	16		$	12		$	54
Expenses:
Operating expenses		1,461			1,567			2,720
Interest expense		1,462			1,521			1,260
Total expenses		2,923			3,088			3,980

Loss from operations		(2,907	)		(3,076	)		(3,926	)

Equity in undistributed earnings (loss) from subsidiaries		6,503			(21,706	)		3,761

Net income (loss)	$	3,596		$	(24,782	)	$	(165	)

F-51

FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)

SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2007			2006			2005
	(In thousands)

Cash flows from operating activities:
Net income (loss)	$	3,596		$	(24,782	)	$	(165	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Decrease (increase) in accounts receivables		(160	)		620			(713	)
(Increase) decrease in investment in subsidiaries*		(5,486	)		24,787			333
Decrease (increase) in other assets		18			87			(192	)
Decrease in intercompany receivables/payables *		1,962			431			2,274
Increase (decrease) in other liabilities		(384	)		545			(2,332	)
Net cash provided by (used in) operating activities		(454	)		1,688			(795	)

Cash flows from investing activities:
Decrease in short-term investments		-			-			707
Net cash provided by investing activities		-			-			707

Cash flows from financing activities:
Principal repayments on subordinated notes payable to Investors Life		-			(2,005	)		-
Issuance (purchase) of treasury stock		411			178			365
Net cash provided by (used in) financing activities		411			(1,827	)		365

Net increase (decrease) in cash		(43	)		(139	)		277

Cash and cash equivalents, beginning of year		305			444			167

Cash and cash equivalents, end of year	$	262		$	305		$	444

* Eliminated in consolidation

F-52

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

SCHEDULE III – SUPPLEMENTARY INSURANCE INFORMATION

	Year Ended December 31, 2007, 2006, and 2005
			Future Policy
	Deferred Policy		Benefits, Losses,		Other Policy
	Acquisition		Claims and Loss		Claims and		Premium
	Costs		Expenses (1)		Benefits Payable		Revenue
	(In thousands)

2007	$	15,285	$	539,819	$	7,273	$	8,323
2006	$	14,429	$	570,768	$	6,907	$	5,921
2005	$	11,671	$	603,454	$	7,577	$	5,020

	Year Ended December 31, 2007, 2006, and 2005
			Benefits, Claims,		Amortization of
	Net		Losses, and		Deferred Policy		Other
	Investment		Settlement		Acquisition		Operating
	Income		Expenses (2)		Costs		Expenses
	(In thousands)

2007	$	31,005	$	48,021	$	2,066	$	20,375
2006	$	29,321	$	44,707	$	1,156	$	20,614
2005	$	25,841	$	48,289	$	1,604	$	21,808

(1) Includes contractholder funds

(2) Includes interest expense on contractholder funds

F-53

FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

SCHEDULE IV – REINSURANCE

	Year Ended December 31, 2007, 2006, and 2005
									Percentage
			Ceded to		Assumed				of Amount
	Gross Direct		Other		from Other		Net		Assumed
	Amount		Companies		Companies		Amount		to Net
	(In thousands)
2007
Life insurance in-force	$	3,484,053	$	444,472	$	-	$	3,039,581		0	%
Premium:
Life insurance	$	8,929	$	676	$	-	$	8,253		0	%
Accident and health insurance	$	128	$	58	$	-	$	70		0	%
Total premium	$	9,057	$	734	$	-	$	8,323		0	%


2006
Life insurance in-force	$	3,752,459	$	408,509	$	-	$	3,343,950		0	%
Premium:
Life insurance	$	6,505	$	649	$	-	$	5,856		0	%
Accident and health insurance	$	133	$	68	$	-	$	65		0	%
Total premium	$	6,638	$	717	$	-	$	5,921		0	%


2005
Life insurance in-force	$	4,011,427	$	392,502	$	-	$	3,618,925		0	%
Premium:
Life insurance	$	6,609	$	1,646	$	-	$	4,963		0	%
Accident and health insurance	$	165	$	108	$	-	$	57		0	%
Total premium	$	6,774	$	1,754	$	-	$	5,020		0	%

F-54

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Financial Industries (FNIN) Inactive 10-K2007 FY Annual report

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